By Lindsey Earling & Janelle Edgar, CPA
After the significant hurricanes so far this year, specifically Debby, Helene, and Milton, and the disastrous impacts they have had on the community, it is important to also consider how this can have tax implications. Navigating the complexities of tax deductions related to property damage, business interruptions, and personal losses can help mitigate some of the financial burdens incurred. This article aims to clarify the current tax treatment of casualty losses, outline the available deductions, and highlight important considerations for those affected by hurricanes. Whether you are a homeowner facing property damage, a landlord grappling with rental income loss, or a business owner dealing with operational disruptions, understanding these tax implications is essential for making informed financial decisions in the aftermath of a hurricane.
I. Casualty Loss Deduction
Casualty losses are defined as the damage, destruction, or loss of property from a significant and sudden, federally declared disaster, such as a hurricane or flooding, and can be deducted in the year they occur. Different types of properties have different tax treatments and are split into two general categories:
- Nonbusiness losses are losses incurred by individuals on personal property not used for business purposes. This is for items such as personal residences, furniture, or vehicles.
- Business losses are losses incurred by businesses on property used for business purposes, including rental businesses. Examples include commercial buildings, inventory, equipment, or rental properties.
If the taxpayer is eligible to deduct a casualty loss, it is important to make sure all documentation and records to support their claims are kept throughout the process, including:
- Details of the property damage.
- Calculations of the loss.
- Any insurance proceeds.
- Repair estimates.
II. Tax Treatment for Individuals
For tax years 2018-2025, personal casualty losses are not deductible unless the loss is caused by a federally declared disaster, such as the recent hurricanes that have impacted our area. Personal casualty losses include losses to your home, household items and vehicles. To be considered eligible for claiming a casualty loss deduction, the taxpayer must own the damaged property and be able to supply proof that the damage happened as a result of the casualty. The deduction can be claimed on the individual’s federal tax return in the year the loss has occurred or elected to claim in the prior year.
If the loss is a result of a federally declared disaster, the taxpayer does not need to itemize to receive the deduction.
The loss is deductible to the extent that the loss exceeds $100, and the losses must exceed 10% of the taxpayer’s adjusted gross income (AGI). For married filing joint taxpayers, you are treated as one individual taxpayer when applying the loss limitation rules, whether the property was owned jointly or not. Conversely, for married filing separately taxpayers, each taxpayer must qualify separately for the $100 and 10% of AGI limitations.
Per IRS Publication 547, federally declared disasters that occurred between December 2019 and January 2021 were specified as Qualified Disaster Losses. The qualifying losses claimed during this period did not limit the deduction to 10% of the taxpayer’s AGI, however, each casualty loss was reduced by $500. The IRS has not provided the 10% of AGI limitation exclusion to federally declared disasters since January 2021. As such, the 10% of AGI and $100 limitations are used to determine the deductible loss.
To claim the casualty loss, taxpayers must file a Form 4684 with their individual tax returns. The amount taxpayers can deduct is the lesser of the adjusted basis of the property or the difference in the property’s fair market value immediately before and after the casualty, less any insurance reimbursement or other type of reimbursement. The cost of repairs is acceptable evidence for the loss.
If insurance reimbursement claims are not paid until the following year, the loss should still be reduced on the current year’s tax return by the expected amount to be received. If a casualty loss is reduced by an estimated reimbursement and the reimbursement is less than expected, the taxpayer can either amend the tax return or report the difference on a subsequent year tax return when the payment was received. Alternatively, if the reimbursement is more than expected, the difference will be included in income. However, if any part of the original deduction did not reduce the tax in the earlier year, then the taxpayer will not include that portion of the reimbursement amount in income.
Taxpayers are automatically eligible for the deduction based on the address the IRS has on record; there is no need to contact the IRS. However, if the taxpayer has a new address in the affected area from last year, they may receive a notice from the IRS. If this is the case, the taxpayer should call the number on the notice and may need to provide proof of residency at that new address.
III. Tax Treatment for Businesses
Businesses also have the ability to claim the losses they have sustained from casualties. The business must make a casualty loss election regarding the treatment. You can take the deduction in the current year or carry it back to the prior year. Business losses are generally broken down into two categories: Business Property or Inventory.
The deductible amount of the business casualty loss is the lesser of the taxpayer’s adjusted basis of the property or the difference in the fair market value of the property before and immediately after the casualty. For each item the business is claiming the deduction, the amount of loss needs to be calculated for each individual item. The amount is also reduced by any insurance recovery and salvage value. As mentioned above, if the insurance reimbursement is not paid in the current year, the loss still must be reduced by the expected amount.
If a business has business interruption insurance, the proceeds received from the insurance reimbursement for this type of coverage are included in taxable income since they replace lost profits.
To claim the casualty loss, the business must file a Form 4684 with their return. Part B of the form is specific to business losses. Business property losses that are considered 1231 property will be considered an ordinary loss and will not be grouped with other 1231 transactions. Businesses should be prepared to prove the loss was correlated to the federally declared disaster. If the business is a sole proprietor, the loss is reported on the individual taxpayer’s Schedule C as an ordinary deduction.
Additionally, if inventory is damaged from the impact of a federally declared disaster, a business can write off the loss of this inventory in one of two ways. Either by increasing the cost of goods sold and adjusting opening and closing inventory appropriately or by deducting the casualty loss and eliminating the affected inventory from cost of goods sold to avoid double-counting the loss .
IV. Tax Treatment for Rentals
For tax purposes, rental properties are treated as business properties. The deduction is available to all owners of the rental property. Therefore, if the property has multiple owners, the loss should be split among each owner.
The amount of a business casualty is determined the same as that of a business, which is the lesser of adjusted basis or decline in FMV, with any insurance reimbursements deducted from the total amount. The amount of loss is calculated for each individual item damaged or lost. To report losses, rental property owners should file a Form 4684 to calculate the deductible amount and report any loss on the Schedule E.
If a taxpayer leases property, the lessee can deduct a casualty loss on the property if the lessee is liable for damages and the lessor does not take a deduction. A lessee must be able to prove they were liable for damages. The deductible loss is the amount the lessor paid to repair the property less any reimbursements received or expected to be received.
If the taxpayer leases real property and their personal items were affected, the deductibility of the losses on those personal items are considered separately from the leased property deduction.
V. Tax Relief for Affected Taxpayers
As of October 2024, the IRS has announced extensions for individuals and businesses in the entire states of Alabama, Florida, Georgia, North Carolina and South Carolina, and parts of Tennessee and Virginia to May 1, 2025. This extension will apply to the following tax filing and payment obligations:
- Any individual or business that has a 2024 return normally due in March or April 2025.
- Any individual, business, or tax-exempt organization that has previously filed a valid extension for their 2023 federal return.
- 2024 quarterly estimated tax payments normally due January 1, 2025, and April 15, 2025.
Affected taxpayers claiming a disaster loss should insert a FEMA disaster declaration number on their return. It is important to note that the appropriate FEMA code should be utilized based on the area the taxpayer resides.
The extension to May 1, 2025, applies to both Hurricane Helene and Hurricane Milton. However, Hurricane Helene’s extension of time does not apply to all of Florida, as certain counties in Florida were not impacted by that disaster. The extension from Helene covers all of Alabama, Georgia, North Carolina, South Carolina, and parts of Tennessee. As such, the Hurricane Milton FEMA code should be utilized for Florida extensions.
- Hurricane Milton FEMA Code 3622-EM
- Hurricane Helene FEMA Code 3615-EM
The extension also applies to taxpayers who are not in a covered disaster area but whose records to meet a deadline are in a covered area (such as if their tax preparer is in a qualified area).
Specific counties considered in a federally declared area can be found on the IRS website. Note that each state has also issued state-specific tax relief, including state tax filing deadlines and property tax rebates. Be sure to check your state’s specific guidance for more information on additional tax relief measures.
As with most tax situations, individual circumstances vary and may affect your results. Please consult your tax advisor before relying on the information in this article. For more information about claiming a casualty loss on your tax return and how our office can help you through this difficult process, visit our website or contact us at 813-875-7774.
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