Deducting Losses from a Natural Disaster

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As we watch the news of another approaching hurricane we are again reminded of the terrible damage that can be cause by a natural disaster.

Natural and man-made disasters can strike a family child care provider’s home at any time: fire, flood, storm, theft, earthquake, tornado, hurricane, or car accident.

Perhaps the only positive thing that can arise from such disasters is the fact that you may be able to deduct the cost of damage, destruction, or loss of your property.

Such casualty losses can include damage to your home, furniture, appliances, equipment, toys, etc. Related expenses that result from a casualty loss, such as the treatment of personal injuries, cleanup and minor repairs, temporary housing, rental car, replacing spoiled food, etc. may
also be deductible.

You must file a timely homeowner’s insurance claim before you can deduct these costs. 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 under insured), then you may be able to claim some business deductions that will reduce your taxes at the end of the year. See my article, “Are You Under insured? Probably Yes”.

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.

If the hurricane or other disaster causes you to have to shut down your business temporarily, you cannot deduct your loss of income as a business expense on your tax return. You will report less income on your tax return and therefore pay less in taxes. Your business liability insurance policy may provide coverage that pays you for some of your loss of income.

Report your casualty loss on IRS Form 8829 Expenses For Business Use of Your Home. As you complete this form you will transfer your casualty loss to IRS Form 4684: Casualties and Thefts, Section A.

In general, you can only deduct personal losses that are in excess of $100 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 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 child care 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). If the provider received an insurance payment of $100 for this item, the business loss would be $145.

If you buy items to replace the property that is destroyed or damaged (furniture, appliances, etc.), you can begin to depreciate these items. For example, if the child care provider bought a new swing set for $2,000, she would start depreciating in the year she replaced it.

To help make a faster recovery from a disaster, be sure to keep receipts of all equipment and household purchases.

Here are some tips from the IRS on how to safeguard your tax records.

See also my article,  “When a Natural Disaster Strikes.”

Image credit: efdlrs.com

2014 TW smallFor more information about how to claim a casualty loss, see my annual Family Child Care Tax Workbook and Organizer.



Categories: Deductions, Record Keeping & Taxes

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