If you have suffered property damage from 2011’s destructive weather, remember the rules on casualty loss write-offs. You can deduct losses resulting from disasters such as floods, tornadoes and the like, to the extent not reimbursed by insurance. However, if the property is insured and you don’t file a claim, you can not take the deduction. For nonbusiness filers, your loss starts as the smaller of the property’s tax basis or its decline in value, less any insurance proceeds that you received or expect to receive. Two offsets also apply to personal losses: The loss is first reduced by $100. The balance is deducted only to the extent it tops 10% of your adjusted gross income. Only itemizers can claim a deduction for damage to nonbusiness property. The rules for deducting casualty losses on business assets are more liberal. The $100 and 10% of AGI offsets do not apply, and non itemizers can claim losses. Special rules apply to losses in presidentially declared disaster areas. You can deduct 2011 casualty losses on your 2010 or 2011 return, whichever saves you more money. Your 2010 return should already be filed but you can amend it and get a refund check from the IRS. The benefit to you is that you receive any accompanying tax refunds a year earlier which will provide additional funds to re-build after the casualty. Go to www.fema.gov/news/disasters.fema to view a list of federally declared disaster areas.
The Internal Revenue Code is filled with general rules, exceptions, and sometimes requires detail that is quite cumbersome. The IRS definition of a casualty loss is a sudden, unexpected, or unusual event, such as flood, fire, tornado, earth quake, or hurricane. If your records meet all the general rules and exceptions, you may have a deductible loss on your federal income tax return.
The related expenses you have due to a casualty loss, such as for the treatment of personal injuries, temporary house, or rental car, are not deductible as casualty losses. However, they may be deductible as business expenses. Disaster unemployment assistance payments are taxable unemployment benefits. A loss of future profits is not deductible. Insurance and other reimbursement for your loss must be subtracted from the loss when you figure your deduction. You cannot deduct the reimbursed part of the casualty loss.
Casualty losses are a red flag for an IRS audit and you will need to produce documents supporting the values, basis, and depreciation. The IRS auditor is not sympathetic to a “I lost my records” excuse. First you will need to prove that you owned each and every asset. Secondly, you have to show that each individual asset was lost or destroyed. The amount of information you need to support your loss is very voluminous and detailed. You should have the following available: Contracts or purchase receipts for the original cost basis plus any improvements; Copies of old tax returns complete with detailed depreciation taken on each asset; Fair market value of each asset before the casualty; Fair market value after the casualty; Salvage value of surviving assets.
Protecting your records before a casualty occurs is often overlooked by individuals and business owners. A fireproof filing cabinet or safe on location is preferable to leaving records in an exposed area. The success or failure of your casualty loss standing up under an IRS audit will be determined by the quality of your records.
