Due to the coronavirus (COVID-19) and the nationwide emergency, relief is being provided at both the federal and state levels. Visit the AICPA’s Coronavirus Tax Resource Center for the latest developments.
In the unfortunate event of a disaster, casualty or theft, your clients will turn to you for advice on how the loss may impact their tax returns and business affairs. This page provides you with guidance and tools to help your clients.
The AICPA continues its advocacy efforts in support of our permanent tax disaster relief recommendations. See our advocacy page for our latest efforts.
A casualty loss results from a sudden, unexpected or unusual event. In computing casualty losses, it is necessary to determine the type of property involved as the tax treatments for personal property and business-use property differ.
A casualty loss deduction for non-business property is claimed as an itemized deduction. Casualty losses can be deducted either: (1) on the original return for the year of the loss, or (2) on an amended return filed for the tax year immediately preceding the year in which the disaster occurred (Sec. 165(i)(1)). Victims should consider reducing their remaining current-year estimated tax payments or withholding in anticipation of a current-year casualty loss deduction.
To deduct a casualty loss, the taxpayer must first calculate the loss and then determine any limits on the amount of the loss that may be deducted.
A casualty loss is calculated by subtracting any insurance or other reimbursement received or expected from the smaller of the decrease in fair market value (FMV) of the property as a result of the casualty or the adjusted basis in the property before the event (Regs. Sec. 1.165-7(b)(1)).
Decrease in FMV
The decrease in FMV is the difference between the property’s value immediately before and after the casualty (Regs. Sec. 1.165-7(b)(1)(i)).
To calculate the decrease in FMV caused by a casualty, determine the actual price that the property could have sold for immediately before and after the loss. The worksheets in IRS Publication 584, Casualty, Disaster, and Theft Loss Workbook, and IRS Publication 584B, Business Casualty, Disaster, and Theft Loss Workbook, provide assistance with the loss calculation.
Find guidance for estimating real property casualty losses in the FAQs of SSTS No. 4, Use of Estimates – Casualty Losses of Real and Personal Property.
The basis for casualty loss purposes is the same as the basis that would be used for calculating gain or loss on the sale of the property. Various events may take place that change the basis of ownership during the period the property is owned. Some events, such as additions or permanent improvements to the property, increase the basis. IRS Publication 551, Basis of Assets, provides more information on calculating basis.
Insurance and other reimbursements
Only losses that exceed what was reimbursed by insurance are deductible. If the reimbursement exceeds the tentative loss, the taxpayer may have taxable income. If the property is covered by insurance, file a timely insurance claim for reimbursement of a loss. Otherwise, no deduction as a casualty loss is allowed.
For tax years beginning after Dec. 31, 2017, and ending before Jan. 1, 2026, personal casualty losses will be allowed as a deduction only to the extent they are attributable to a federally-declared disaster (Sec. 165(h)(5)). The president of the United States makes the determination on the federally-declared disaster by determining that the area warrants assistance by the federal government. Further IRS guidance may be necessary to determine the definition of “attributable” to a federally-declared disaster.
- Personal casualty losses from natural disasters, The Tax Adviser, Sept. 2018
- Analyzing the new personal casualty loss tax rules, Journal of Accountancy, July 2018
- Casualty losses and expenditures under Sec. 162 or 165, The Tax Adviser, May 2018
IRS, State Agency and Other Resources
- Disaster Assistance and Emergency Relief for Individuals and Businesses: Overview page from the IRS that provides links to pertinent disaster relief resources.
- Tax Relief in Disaster Situations: IRS information about the current filing deadlines in disaster areas.
- Disaster Relief Resource Center for Tax Professionals: Addresses common questions from tax professionals.
- Form 4684, Casualties and Thefts, and Instructions: Form for reporting gains and losses from casualties and thefts.
- Disaster Assistance Self-Study – Record Reconstruction: IRS page to assist taxpayers with reconstructing their records after incurring a casualty loss.
- Local Red Cross Chapters: Enter a zip code to search for a local Red Cross center.
- Federal Emergency Management Agency (FEMA): Shows a list of disaster areas by year and by state.
- Insurance company claims filing telephone numbers: Helps policyholders with questions regarding coverages for damage caused by a disaster.
- Frequently asked charitable contribution deductions questions: Answers common questions related to charitable giving to disaster victims.
Reviewed August 28, 2019