Casualty Loss Deduction (Federal Disaster Zones ONLY)

• Definition: A casualty loss occurs when your property is damaged or destroyed due to an unexpected event like a natural disaster.
• Eligibility: If your loss is within a federally declared disaster zone, you may be eligible to deduct the loss on your federal tax return.
• Calculation: The deductible amount is the lesser of your property's adjusted basis (usually what you paid for it) or its decrease in fair market value, minus any insurance reimbursement.
• Limitations: The deduction applies only to the extent that the loss exceeds $100 per event and 10% of your Adjusted Gross Income (AGI). However, if the loss occurs in a federally declared disaster area, the deduction is more generous, allowing you to bypass some of these limitations.
• Timing: You can choose to claim the loss in the year the disaster occurred or on the prior year's tax return to receive a quicker refund.

Insurance Reimbursements - IMPORTANT

• If you receive insurance payments, the amount reimbursed will reduce your casualty loss deduction. If the reimbursement exceeds the property’s adjusted basis, you may face a taxable gain, but deferral options are available under IRC Section 1033 (Involuntary Conversion).

Casualty Loss Deduction for Rental Property

• Eligibility: Rental property, as business-use property, qualifies for casualty loss deductions without the personal limitations of the $100 or 10% AGI threshold.
• Calculation: The casualty loss for rental property is calculated based on the property’s adjusted basis or decrease in fair market value, whichever is lower, after reducing it by insurance or other reimbursements.
• Filing Flexibility: For properties in federally declared disaster areas, owners can elect to claim the loss on the previous year’s tax return, which may expedite tax relief.
  
  

Involuntary Conversion Deferral (IRC Section 1033)

• If insurance proceeds exceed the property's adjusted basis, resulting in a gain, you can defer that gain by reinvesting the proceeds in similar or related property within two years (or up to four years in federally declared disaster zones).
  
  

Repairs and Improvements

• Repairs vs. Improvements: Costs to repair the rental property can be deducted as current expenses, while improvements must be capitalized and depreciated over time. This distinction can affect your tax planning after a disaster.

Casualty Loss Deduction for Business Property

• Eligibility: Business property is eligible for a casualty loss deduction, similar to rental property.
• Immediate Deduction: Unlike personal losses, business casualty losses are deductible in the year the disaster occurred, with no requirement to exceed a percentage of AGI.
• Prior Year Election: Like individuals and rental real estate owners, small business owners can also elect to claim the loss in the prior year to receive an accelerated refund.
  
  

Net Operating Loss (NOL) Carryback

• If a casualty loss results in a Net Operating Loss (NOL) for the year, businesses in federally declared disaster areas can carry the NOL back up to five years to recover taxes paid in previous years, providing a cash flow boost.
  
  

Extended Deadlines

• The IRS often extends filing and payment deadlines for small business owners in federally declared disaster zones, allowing more time to assess damages, file claims, and meet tax obligations.
  
  

Qualified Disaster Relief Payments IRC 139

• If a business provides financial assistance to employees impacted by the disaster, these payments may be excluded from employees’ taxable income, and the business can deduct the payments as operating expenses.

Qualified Disaster Distribution from Retirement Accounts (Penalty Free)

• Individuals affected by a disaster may be eligible to take early distributions from their retirement accounts (like 401(k) or IRA) without facing the 10% early withdrawal penalty. The distribution is still subject to regular income tax but can be spread out over three years to mitigate the tax burden.