Sacramento CPA, Tax, Accounting, Bookkeeping
Casualty and Theft Losses
A taxpayer may claim a tax deduction for all or part of a loss associated with theft or casualty. The tax loss can only be claimed if the taxpayer itemizes his tax deductions. The tax loss is taken on Schedule A of tax form 1040.
Casualty Losses
A casualty loss can occur due to damage, destruction, or loss of property caused by an identifiable event that is sudden, unexpected, or unusual. A loss is not considered a casualty if it’s due to the deterioration of property caused by termites, moths, drought, etc.
If a taxpayer claims the casualty tax loss on his tax return, he must be able to provide the following information:
- When the casualty occurred and the type of event;
- That the loss was caused by the casualty;
- That the taxpayer was the owner, or if it was a leased property, the taxpayer must show that he was liable to the owner for the damages; and
- Whether there’s a claim for reimbursement for which recovery is expected.
Theft Losses
A theft is the unlawful intent of an individual to remove property or money from another individual. The removal of property must be illegal in the state it occurs and done with criminal intent. Lost or misplaced property doesn’t qualify for a tax deduction.
If a taxpayer claims the theft tax loss on his tax return, he must be able to provide the following information:
- When the property was discovered missing. (Theft losses are claimed as tax deductions in the year it’s discovered even if the event occurred last year);
- That the property was stolen;
- That the taxpayer owned the property; and
- Whether there’s a claim for reimbursement for which recovery is expected.
Amount of Loss
The amount of a casualty or theft loss is the lesser of (1) the decrease in fair market value of the property or (2) the adjusted basis in the property before the event.
A taxpayer can use the cost of repairing the property as the decrease in fair market value if this amount isn’t greater than the fair market value of the property prior to the casualty or theft.
A nonbusiness casualty or theft loss greater than 10% of adjusted gross income is tax deductible whereas there aren’t any limitations on business property casualty or theft losses. If business casualty or theft losses exceed gains, they are tax deductible on form 4797 as ordinary tax losses.
Insurance Reimbursements
Insurance reimbursements must be subtracted from the loss after the tax deduction is calculated. If the reimbursement is greater than the taxpayer’s basis, there will be a gain.
Filing a Lawsuit
Filing a lawsuit doesn’t mean that the property can be recovered, however, this does show that the taxpayer thinks there’s a chance of recovery. If there’s evidence that the property can be recovered, the loss will not be tax deductible until the lawsuit is complete.
If the taxpayer fails to file a lawsuit, this doesn’t mean than the property won’t be recovered. The tax loss may not be allowed if the taxpayer didn’t file a lawsuit when the chance of recovering the property was likely.