As we gear up for Tax Day – which is on April 18th this year! – we’re doing a series of posts for the small business owners who most frequently come to us with questions. This week, we’re discussing a deduction we hope you won’t need – a tax writeoff for employee theft or embezzlement.
Summary: This article focuses on tax deductions available to small businesses for losses stemming from theft. A critical insight is that, unlike personal theft losses, losses of business property due to theft remain fully deductible. The article clarifies that “theft” encompasses various illegal takings, and the loss is deductible in the tax year it is discovered. Calculating the deductible amount involves determining the lesser of the property’s original cost basis or its fair market value decrease, then subtracting any insurance payouts. Meticulous documentation, including police reports and valuation evidence, is essential. Businesses must accurately report these losses on appropriate tax forms. Given the nuances of property valuation and insurance claims, seeking professional tax advice is strongly advised for accurate deductions and compliance.
It’s sad but true, employees sometimes steal – and it could happen to you!
But of course, the silver lining is that you do get an extra deduction.
If you had the bad fortune to employ a thief this tax year, here’s what you need to know.
First things first: file a police report. You’ll need the extra documentation in case the IRS asks you to substantiate your claim.
If they stole it, you can deduct it. Blackmail, embezzlement, fraud, extortion, robbery, burglary – it’s all fair game under the IRS’ definition of theft. If your employee has “taken or removed property with the intent to deprive the owner,” that action counts as theft and it’s fair game for a write-off.
You’re entitled to a deduction for the full fair market value of your property, but…. There’s always a “but” with the IRS.
Make sure you report theft using the right forms. If your dastardly employee stole money, you’re required to calculate your losses on Form 4684, “Casualties and Thefts.” Then you take the total from that form and enter it on Line 14 of your Form 1040 under “Other gains (or losses)”.
On the other hand, if the villain made off with some other type of property (such as your inventory), you don’t have to use Form 4684. When you fill out your Schedule C, you can just deduct the value of the theft from your closing inventory – increasing your total business expenses and, of course, giving you a larger deduction. But keep in mind that if you go this route, then you cannot also deduct those items on Form 4684. (You’ve got to pick one.)
You can read all about the IRS guidelines for theft deductions in this lovely long document.
If you have any questions about theft deduction, give us a call at 844-841-9857, or schedule a free consultation here.
