Form 4684 is an IRS form for reporting losses or gains from theft and casualties. According to the IRS, very specific definitions of theft and casualties determine whether you may claim a deduction on business property that was stolen, damaged or destroyed. This guide explores these definitions, what qualifies as a casualty loss deduction and tax preparation tips for disaster losses.
The business theft loss deduction is allowed for certain qualifying theft losses. This might include when property or money is taken from the owner with a criminal intent to deprive them. The theft must be considered illegal according to state laws. Some broad examples of theft may include:
To claim a tax deduction for theft of money or property, the taxpayer must provide the date the loss was discovered, the amount of the loss and proof that the theft occurred under the jurisdiction’s law.
A qualified disaster loss is a theft or casualty loss of personal or business property. To qualify on Form 4684, the loss must have been caused by a major disaster declared by the President in section 401 of the Stafford Act during particular years, Hurricane Maria, Hurricane Harvey, Hurricane Irma, Tropical Storm Harvey, and California wildfires in 2017 and January 2018. Qualifying for a qualified disaster loss makes you eligible to claim a casualty loss deduction.
The Tax Cuts and Jobs Act allows taxpayers to deduct losses not caused by a federally declared disaster when losses offset nonbusiness casualty gains.
A casualty loss is a loss of property due to sudden, unexpected events that result in loss of use, destruction or damage to said property. The following causes of losses may allow you to qualify for a casualty loss tax deduction:
Some examples of losses that do not qualify for the deduction may include:
If your business has lost inventory due to theft or a qualifying casualty, you can pursue two options for deductions.
First, you can deduct the loss by reporting your opening and closing inventories, increasing the value of the cost of goods sold by the loss amount to inventory. Include any reimbursements you received for gross income losses. Be sure not to claim the loss again as a theft or casualty loss.
The second option is to deduct separately. Make a downward adjustment to your opening inventory, eliminating the affected inventory items from the cost of goods sold. Use the reimbursements you received to reduce the loss. Remember not to include the reimbursements in your gross income.
According to the IRS, the fair market value (FMV) of stolen property right after a theft is zero, as you no longer have the property. However, the FMV for business or income-producing property is not considered when that property is stolen or completely destroyed. This loss can be calculated as the adjusted loss in property value minus reimbursements and the salvage value of the property.
Start by estimating how much the property’s value has dropped before and after the event. Subtract any insurance money or compensation received for the property. Generally, the amount for casualty and theft losses due to federally declared disasters must be at least $100 per casualty and meet the 10% adjusted gross income limitation. However, casualty and theft losses caused by a qualified disaster loss must be $500 or more, although they are not subject to 10% of the AGI reduction.
Here are a few best practices to follow when you have potential disaster losses.
When damage occurs due to one of the qualifying losses, take detailed pictures of the damaged property immediately. Include before and after pictures of repairs, restoration and rebuilding work. Also, document pre-loss pictures to showcase the extent of the damage and how the property looked before the casualty loss.
Create a detailed list of the damaged property and keep all replacement receipts. Track the cost basis of all damaged property and insurance claims. It may help to group lower-value items like office supplies together while documenting losses.
In some cases, your financial records and receipts for tax filing may be destroyed during disasters. Try to reconstruct your financial records using alternative methods approved by the IRS. Common reconstruction methods include:
It may help to get professional assistance to learn the best reconstruction methods for your particular situation. Otherwise, it’s important to compile the relevant financial information before a disaster.
Professional assistance is valuable for tax preparation when having experienced theft or disaster losses. There are various casualty loss rules and advantages you may maximize with the assistance of a knowledgeable professional. By understanding your unique situation, the tax professional may identify key opportunities that increase your tax refund.
Tax preparation often requires considerable time and effort — even more so when you have additional forms to file for theft and casualties. If you’re busy dealing with repairs and finances in the aftermath of one of these events, it’s helpful to work with a skilled tax preparation firm like Polston Tax.
Our professionals have a comprehensive understanding of tax laws, strategies and theft and casualty loss deduction rules to assist taxpayers in maximizing their deductions. Key benefits of tax preparation services with Polston Tax include:
Dealing with the aftermath of disasters and theft can often take a lot of time and attention. That’s why our professionals at Polston Tax are dedicated to helping you prepare your taxes properly so you can receive the deductions and tax relief you qualify for.
Whether you’re a business entity or an individual, our knowledgeable and experienced team of professionals will streamline the process. To discuss your options, schedule a consultation with us today.
