Casualty Losses in Federally Declared Disasters
In the wake of the recent devastation caused by major back-to-back hurricanes, taxpayers with property damage from either Hurricane Harvey,Irma or Maria will need to determine how to properly account for the losses suffered.
In general, casualty losses—including losses from disasters such as hurricanes, tornadoes, storms, and floods—are deductible in the tax year in which the losses were sustained (i.e., disaster year). However, where losses are incurred in a federally declared disaster area, such as in the case of Hurricane Irma and Hurricane Harvey, taxpayers may elect to deduct casualty losses in the year immediately preceding the tax year of the disaster. As such, victims of Hurricane Harvey, Irma or Maria have the option to take casualty loss deductions either in the disaster year (2017 tax year) or, for a more immediate tax benefit, in the prior year (2016 tax year). (This is accomplished by amending the prior year return.)
PERSONAL USE PROPERTY
Individuals are required to claim casualty losses as an itemized deduction. For personal use property, the amount of casualty loss is determined by first taking the lesser of (1) the adjusted basis in the property before the casualty, or (2) the decrease in fair market value of the property as a result of the casualty, and then subtracting any insurance or reimbursement received (or expected to be received). The resulting amount is then reduced by $100 (per-casualty floor) with any excess decreased by 10% of the taxpayer’s adjusted gross income.
BUSINESS OR INCOME- PRODUCING PROPERTY
For business or income-producing property, such as rental property, the aforementioned limitations do not apply. To determine the amount of loss, the adjusted basis in the property is reduced by any salvage value and/or insurance reimbursements received (or expected to be received). For these purposes, fair market value decreases are not considered in the determination of the amount of business property losses.
THE MARCUM 2017 YEAR-END TAX GUIDE
It is important to note, however, that losses of business inventory can be treated as either a casualty loss or as an increase to the cost of goods sold.
Effective as of October 13, 2016, the due date for making an election to deduct a disaster loss in the tax year immediately preceding the disaster year is six months after the regular due date for filing the original federal income tax return for the disaster year (without extensions).
Lawmakers may be currently considering various tax relief proposals including a proposal to increase casualty loss deduction limitations. However, as no bill has been introduced as of this writing, the tax professionals at Marcum will continue to keep you posted on any relevant developments.