If you've suffered a fire, car accident, major theft or natural disaster, you may be eligible to recoup part of your losses when you file your next tax return. Unfortunately, IRS doesn't offer a simple way to do so. Instead, you are required to file a Form 4684 with your tax return. How to file the form and where to claim the deduction differs between personal and business property.
Define the type of casualty and determine whether it is a business loss or personal one. In most cases this is fairly simple, but sometimes there are multiple results of a single disaster. A hurricane, for example, may cause wind damage and flooding, and it could affect business and personal property of a Schedule C filer. You will need to clearly define the casualty--in this case hurricane damage is primary--and separate the personal from the business losses. Use Section A for personal and B for business.
Determine the total value of each type of loss. In columns A through D, one loss might be your residence (including landscaping), another could be your vehicles and another might be your personal possessions inside the house. Think in the same categories your insurance agent does, but the values won't necessarily be the ones your insurance agent uses. You may be insured for "replacement cost" but IRS is only concerned with fair market value (FMV) before and after the loss. For this reason, insured personal losses will often not result in a casualty loss tax deduction after deducting the insurance proceeds and the $500 IRS deductible on the grouped assets.
Follow the same basic instructions above for business-related losses. Columns might include real property owned by the business, equipment within the property, landscaping, business vehicles. Assets held less than a year should be separated from long-term assets in the column groupings. Note that for business purposes, landscaping and exterior features are not to be grouped with the real estate. Loss of income is not deductible on Form 4684 but may be deductible elsewhere. FMV of assets that have been completely destroyed or lost due to theft will be zero. There is not a $500 reduction imposed by IRS on business losses the way it is on personal losses. Some loss types are computed using the FMV before the loss and others use your adjusted basis after depreciation you've claimed. See Publication 547 for specific information about each type of asset. You may claim loss of inventory either within the Cost of Goods Sold calculation on your business tax form or on Form 4684, but not both.
Contact your insurance agent. If your losses were insured but you hadn't received an insurance settlement by the end of the loss year, you'll need to estimate the settlement as closely as possible. If you underestimate the settlement amount on your tax return, you may be required to claim the excess as income in the year you actually receive it. The only way to recoup the difference if you overestimate will be to use it as an adjustment on a casualty or theft loss in the year the reimbursement was received.
Transfer the casualty loss totals from each section as described on the form. Individuals with personal losses who will not file Schedule A (Itemized Deductions) will enter the amount from Line 18 of Form 4684 to Line 6 of Schedule L. Those who itemize will transfer the amount from Line 22 of Form 4684 to line 20 of Schedule A. Business losses are transferred from Line 42 or 43 to any of several places, depending on whether the business is a sole proprietorship, partnership, S corporation or C corporation.
The $500 deduction applies to casualty losses incurred between Jan. 1, 2008 and Dec. 31, 2009. After that, the law reverts back to the previous $100 per asset group ($400 maximum per page) unless Congress acts to extend the $500 provision.
There is a special relief act for certain losses suffered between May 20 and July 31, 2008 in the Midwest. See the specific instructions for those losses.
Other Presidentially-declared disasters also qualify for special treatment of losses. See Publication 547 for specific instructions.
Things You'll Need
IRS Form 4684
Insurance reimbursement papers
IRS Schedule L or Schedule A for personal losses