by Tom Copeland

Natural and man-made disasters can strike at any time: fire, flood, storm, theft, earthquake, tornado, hurricane, or car accident. Property losses that result from these sudden, unexpected events may be partly deductible, whereas losses of money, breakage of china or glassware, or progressive damage due to termites, insects, or disease are not deductible. You must file a timely insurance claim before you can deduct a sudden or unexpected loss. If your insurance fully covers these losses, you can't claim any losses. If your insurance doesn't fully cover them (if you must pay a deductible, or if you are underinsured), then you may be able to claim some business deductions that will reduce your taxes at the end of the year.

Related expenses that result from a casualty loss or theft, such as the treatment of personal injuries, cleanup an minor repairs, temporary housing, rental car, replacing spoiled food, etc. may also be deductible. Your losses should be divided into personal and business losses. If the property destroyed was only used by your family, it's a personal loss. If it was only used by your business it's a business loss, and if it was used by both, it's both a personal and business loss.

Income you lose because of a fire is not a deduction. You will report less income on your tax return and therefore pay less in taxes. Your business property insurance policy may provide coverage that pays you for some of your loss of income.

November 2003

Fill out Form 4684 Casualties and Thefts, Section A to determine if you can deduct any of your personal losses not covered by insurance. In general, you can only deduct personal losses that are in excess of $100 for each item and total more than 10% of your adjusted gross income. Because of this high threshold (a family with an adjusted gross income of $30,000 would only be able to deduct personal losses in excess of $3,000), it is difficult for some providers to deduct personal losses.

Business losses are also claimed on Form 4684, Section B. Providers can more easily claim business losses because there is no income threshold. If an item is completely destroyed, the business loss is determined by taking the purchase price of an item, minus the depreciation already claimed on it (or entitled to be claimed on it). For example, if an uninsured provider purchased a swing set for $1,000, had a time-space percentage of 40%, and depreciated it for two years before it was destroyed in a fire, the business loss would be $245 ($1,000 x 40% = $400 - $155 [two years of depreciation deductions] = $245).

After filing out Form 4684, providers must then transfer their business losses first to Form 4797 Sales of Business Property and then to Form 1040 where they are deducted. If you buy items to replace the property that is destroyed or damaged, you can depreciate them.

To help make a faster recovery from a disaster, be sure to keep receipts of all equipment and household purchases. Take pictures of your furniture and appliances and store them in a safe deposit box.

An insurance note: Many homeowner's insurance policies only cover property used in a provider's business up to $2,000. Providers should examine their own policy to find out if their business property is properly covered. If not, they should purchase additional business property insurance. Business liability insurance will not cover for the loss of business property.

This handout was produced by Think Small (www.thinksmall.org).

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