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Discussion
Taxpayers are generally able to deduct any casualty and theft losses related to their personal and real property as an itemized deduction. Additionally, the treatment of casualty and theft losses differs depending on whether the property was used for personal or business purposes.
Calculation of the Loss
Calculation of a business casualty loss is relatively simple. The deduction is calculated by taking the taxpayer's tax basis in the asset less any insurance proceeds. Depending on the type of entity that suffered the casualty loss, the deduction will either be separately stated on Schedule K, reported as an itemized deduction, or reported as a deduction on a corporate tax return.
Calculation of a personal casualty loss is slightly more complicated. The deduction will be equal to the lesser of the following:
- The adjusted basis of the property; or
- The decrease in the fair market value ("FMV") of the property.
Additionally, the taxpayer will reduce the loss first by $100 for each event, and second by 10% of their adjusted gross income ("AGI"). It's also important to be aware of the fact that casualty expenses will not provide a benefit to the taxpayer (excluding the exceptions mentioned above) unless the itemized deductions of the taxpayer exceeds the standard deduction for the year which will be increasingly difficult in 2018 when it is effectively doubled.
Gain on Involuntary Conversion
If the taxpayer recognizes a gain (insurance proceeds in excess of the basis in the property/decrease in FMV), they will be required to recognize the gain on the involuntary conversion to the extent that they do not reinvest the proceeds in similar property. The basis in the new property will be equal to the amount paid for the new property less any deferred gain.
References
https://www.irs.gov/taxtopics/tc515
https://www.irs.gov/publications/p547
Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.