A business casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, and unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.

If your property is not completely destroyed, or if it is personal-use property, you will need to determine your loss from a casualty by first figuring the decrease in fair market value of your property as a result of the casualty event. Keep in mind the general definition of fair market value is the price at which property would change hands between a buyer and seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

If your business or income-producing property is completely destroyed, the decrease in fair market value is not considered. Unfortunately, your loss is the adjusted basis of the property, minus any salvage value and any insurance or other reimbursement you receive or expect to receive (for more information on determining adjusted basis see Publication 551, Basis of Assets). Essentially you get what you can document you paid for it, adjusted for depreciation or additions.

And, as much as many businesses would like to, in figuring your loss do not consider the loss of future profits or income due to the casualty. Casualty losses are claimed on Form 4684, Casualties and Thefts. Section A is used for personal-use property and Section B is used for business or income-producing property. If personal-use property was destroyed or stolen, you may wish to refer to Publication 584B, Business Casualty, Disaster, and Theft Loss Workbook.

Casualty losses are generally deductible only in the year the casualty occurred. However, if you have a deductible loss from a disaster in a Presidentially-declared disaster area, you can choose to deduct that loss on your tax return for the year immediately preceding the year of the casualty. If you have already filed your return for the preceding year, the loss may be claimed in the preceding year by filing an amended return (Form 1120X for Corporations).

Generally, you must make the choice to use the preceding year by the due date of the current year’s return, without extensions. For example, the election to deduct a 2005 disaster loss on your 2004 return must be made on or before the due date (without extensions) of the 2005 return. You can revoke this choice within 90 days after making it by returning to the IRS any refund or credit you received from making the choice. If you revoke your choice before receiving a refund, you must return the refund within 30 days after receiving it for the revocation to be effective.

Generally, you can choose to postpone reporting gain due to insurance proceeds that exceed your basis in property destroyed or damaged by a casualty if you purchase replacement property or repair the damage within two years. Postponement of gain is only available if the amount you spend on replacing or repairing your property is equal to, or exceeds, the insurance proceeds you receive. Otherwise, the excess of the insurance proceeds over the amount you spend to replace or repair your property must be reported as gain.

If your loss deduction is more than your income, you may have a net operating loss. You do not have to be in business to have a net operating loss from a casualty. For more information, refer to Publication 536, Net Operating Losses.

The IRS may postpone for up to one year certain tax deadlines of taxpayers who are affected by a Presidentially-declared disaster. The tax deadlines the IRS may postpone include those for filing income, estate, gift, generation-skipping transfer, certain excise, and employment tax returns, paying taxes associated with those returns, and making contributions to a traditional IRA or Roth IRA.

If the IRS postpones the due date for filing your return and for paying your tax and you are affected by a Presidentially-declared disaster area, the IRS may abate the interest on underpaid tax that would otherwise accrue for the period of the postponement.

In recent updates tax relief is available to victims of Hurricane Gustav in Louisiana and Mississippi. Certain filing and payment deadlines have been postponed until Jan. 5, 2009. With an active hurricane season underway, the IRS recommends that taxpayers in vulnerable areas take steps now to protect their tax and financial records. For further information on hurricane recovery, visit the Federal Emergency Management Agency hurricane response page.

In other areas, recent disaster tax relief has been authorized for:

  • Definition of the Midwestern Disaster Area for Purposes of Certain Provisions of the
  • Tax Extenders and Alternative Minimum Tax Relief Act of 2008
  • Victims of Wildfires in California
  • Victims of Storms and Flooding in Missouri
  • Victims of Storms and Flooding in Puerto Rico
  • Victims of Storms and Flooding in Indiana
  • Victims of Hurricane Ike in Texas and Louisiana
  • Relief for Hurricane Gustav Victims in Louisiana
  • Relief for Victims of Tropical Storm Fay in Florida
  • Relief for Victims of Hurricane Dolly in Texas
  • Special Relief for qualified recovery assistance property placed in the Kansas disaster area
  • Special Help for Greensburg, Kan., Tornado Victims

This area of practice, disaster valuation, is one in you should make sure to choose a company that has especially in-depth knowledge and experience. Many times the key to a successful position is an in-depth understanding of the value and profit drivers of a business and being able to correctly isolate the financial and competitive changes that affect that business.

Neil Lemons is an independent writer who enjoys writing articles to be used as business valuation resources. He has years of knowledge, and has written many articles about business valuation, with a particular focus in the business litigation services arena.

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