Casualty Losses: Accelerate the Refund

Irma's gone, but she managed to do quite a lot of damage before making her trek north. Now, as we pick up the pieces, maybe there's a ray of sunshine peeking around the clouds, and relief can be found in the form of a tax benefit. In a federally declared disaster area, casualty losses can be accelerated and deducted on a prior year tax return. The decision when to deduct the loss is at the taxpayer's discretion, and therefore, Hurricane Irma casualty losses can be deducted on either the 2016 or 2017 income tax return.

Casualty losses arise from an identifiable event that is sudden, unexpected, or unusual in nature. Examples of events that qualify include natural disasters such as tornadoes, hurricanes and earthquakes, as well as fires, automobile collisions, theft and vandalism.

For tax purposes, casualty losses are divided into three categories, each with differing tax treatments. The category of loss will depend upon the use of the affected property. The categories are:

• Business property;

• Income-producing property; and

• Personal property.

Business property includes business fixed assets as well as goodwill. The amount of loss is limited to the adjusted tax basis of the destroyed property. For property that is partially destroyed, the loss is limited to the lesser of the adjusted basis in the property or the decline in fair market value. An appraisal is recommended to establish and document the decline in value, but the actual cost of repairs can be used as an alternative estimate of decline, as long as the repairs do not increase the value of the property above pre-casualty levels. Business casualty losses are deducted against the regular income of the business.

Income-producing property includes real property and personal property used for the production of income. A good example of income-producing property is rental real estate. The loss computation for this type of property is the same as with business property with the only difference the placement of the loss on the individual 1040. An income-producing property casualty loss is deducted as an itemized deduction on Schedule A.

Personal property includes personal-use assets such as homes, boats, jewelry, etc. Personal casualty losses are subject to two limitations:

• Loss reduced by $100, and

• Loss reduced by 10% of adjusted gross income.

Personal casualty losses are deducted as itemized deductions on Schedule A of Form 1040.

For example, Joe had a sailboat that was moored in Sarasota Bay. The sailboat sank during Hurricane Irma and was a total loss. The value of the sailboat before it sank was $150,000 (purchased by Joe for $165,000). Joe has adjusted gross income of $200,000. His casualty loss deduction will be $150,000 (decline in fair market value) - $100 (statutory reduction) - $20,000 (10% of adjusted gross income) = $129,900. This amount will be on Joe's Schedule A as an itemized deduction.

If the property is insured, a claim must be filed, and any insurance proceeds will reduce the computed loss. If a claim is not filed, a deduction is not allowed for the portion of the loss that was insured. If you voluntarily choose not to file a claim, the loss is not deductible.

Generally, a casualty loss is deducted in the year the loss is incurred. For Hurricane Irma, the loss is deducted on the 2017 return that is due in 2018. A taxpayer who incurs a casualty in a designated federal disaster area can accelerate the deduction to the year prior to the loss.

In my example, Joe is a resident of Sarasota County. Joe can deduct his $129,900 loss on his 2016 or 2017 income tax return. If he already filed his 2016 return, he can file an amended return and claim an immediate refund.

On Sept. 10, President Donald Trump declared the following counties as federal disaster areas: Charlotte, Collier, Hillsborough, Lee, Manatee, Miami-Dade, Monroe, Pinellas and Sarasota.

On Sept. 12, the IRS extended the due dates for filing and payment deadlines for the above listed counties, as well as for other areas added later. For taxpayers who have extended filing deadlines of Sept. 15 or Oct. 15, the new deadline is Jan. 31, 2018. If a taxpayer has not filed a 2016 income tax return, and suffered a casualty loss, the loss can be taken on the 2016 return due on Jan. 31, 2018.

The extended due date also applies to estimated tax payments due Sept. 15 and Jan. 15, 2018. These payments can be made on Jan. 31, 2018.

The IRS is also waiving late-deposit penalties for payroll tax deposits and federal excise tax deposits for the first 15 days of the disaster period.