Business Casualty Losses: Calculating and Deducting Properly

What exactly is a business casualty loss? It is the loss of property due to a certain “casualty”. A casualty in this case can be anything unexpected, including fires, accidents, floods, storms, and more. We’re breaking down some business tax preparation tips and rules for calculating and deducting these losses the right way.

Calculating your disaster loss:

The amount of your loss depends on a variety of factors, including the property’s adjusted basis, if the loss is covered by insurance, and whether your property was completely destroyed or only damaged.

For loss deduction you can deduct the amount of the property decline in value up to its adjusted basis. What is adjusted basis? Your property’s original cost plus any and all improvements made, minus all of the property deductions. Claimed disaster losses and insurance recoveries will help you figure out your basis.

When it comes to insurance and any other type of reimbursement, you’ll need to reduce your disaster loss deduction by the amount of any insurance proceeds or other reimbursement you receive. You don’t have to file an insurance claim to qualify for the business disaster loss deduction. Filing this claim could increase your insurance premiums or even result in canceling your policy.

For your business property, you need to calculate your loss for each damaged item separately instead of all together. If your property is completely destroyed, your loss is calculated by the property adjusted basis minus insurance and salvage value. If your property isn’t fully destroyed, your loss is determined by the lesser of the property’s decline in fair market value or adjusted basis. The best way to figure out your property’s decline in fair market value is by consulting with an appraiser or by using the cost of the repair but keep in mind that number does not count as your casualty loss.

Deducting your casualty loss:

When discussing inventory losses, there are two ways to deduct this loss due to a disaster. One way is to count this loss as a part of your cost of goods sold for that year. Be sure not to claim this loss as a casualty or theft loss. Another way to deduct this loss is to deduct it as a casualty loss.

Determining casualty loss for your leased business property is deductible by you since most leases will have you responsible for any damage. The cost of repairing the property subtracted by any insurance or reimbursement money is what your loss will be.

In order to deduct repairs for damaged property, the IRS states you must have the repair costs be capitalized and added to the property’s basis.

You might be asking yourself, when do I deduct these disaster losses? You can claim your loss during the year it is sustained. If your loss was from a federally declared disaster, you’re able to claim it for the year prior. This can be done on IRS Form 4684.

Whether you’re a small business or just looking to learn more about filing your taxes properly, we’re here to help you through the tax planning and tax preparation process. Feel free to contact us at 410-224-2600 and don’t forget we’re also offering virtual appointments. Book yours today!

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