Have you suffered a loss to your business property from a natural disaster or theft? You may be eligible for a tax deduction to ease the impact of the loss. The Internal Revenue Service (IRS) isn't an insurer, but the deduction can save you some money at tax time.

The Tax Cuts and Jobs Act (TCJA), the massive tax reform law that took effect in 2018, greatly reduced the casualty loss deduction for losses to personal property like your home. During 2018 through 2025, only losses to personal property caused by federally declared disasters are deductible. However, this limitation does not apply to casualty losses to business properrty such as an office building, business equipment, or a car used for business. The limitation does apply to property you use as an employee, such as car you use to drive to your employee job.

Casualty Losses

Casualty losses are the damages or complete destruction of property due to a specific event that's either:

• sudden and fast-moving
• unexpected and not caused intentionally
• unusual

Examples are losses from earthquakes, floods, or accidental fires.

Theft Losses

Theft losses happen when someone takes your money or property and intends to deprive you of it. To qualify as a theft for tax purposes, the event must be illegal under your state's laws. You can usually take a deduction when your loss is from crimes such as blackmail, burglary, or robbery.

Proving Your Deduction

You need proof to support taking a deduction. You should be able to explain or show:

• the type of casualty, and the date it happened. If it's a theft, you must explain when you noticed that your property was missing.
• a direct connection between the casualty and the destruction of your property. In the case of theft, you need to show it was actually stolen and that you didn't lose or misplace it.
• you owned or leased the property
• the value of the property before and after the casualty, and
• any money you were paid or expect to be paid as reimbursement for the loss, such as an insurance payment.

Figuring Your Deduction

How to figure your deduction depends on whether your property was completely or partially destroyed. If a single casualty or theft affected more than one item of business property, you must calculate the loss separately for each.

If your business property is completely destroyed or stolen, you calculate your loss by:

1. Figuring out your adjusted basis in the property. This is usually the price you pay for the property plus any increase in value, such as the cost of improvements, and minus any decrease in value, such as for depreciation.
2. Subtracting from the adjusted basis any salvage value of the property. Salvage value is what someone would pay for the property at the end of its useful life. The IRS has tables to help you determine the useful life of your property.
3. Subtract from the amount in Step 2 any money you were paid as reimbursement for the loss, such as insurance payments.

If your property isn't completely destroyed, you calculate your deduction by taking the lesser of:

1. the difference between the property's fair market value (FMV) before and after the casualty. Generally, FMV is the price you could get for the property if you sold it on the open market. Appraisals are often used to show FMV.
2. the adjusted basis of the property--its cost + improvements - depreciation.

Similarly, you have to reduce the amount of the deduction for partially destroyed property by any insurance reimbursements you receive. If your partially destroyed business property has increased in value since you purchased it, your deduction will always be limited to its adjusted basis.

The IRS has a workbook you can use to help figure your loss; see Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook.

Special Rule for Inventory

There are two ways to deduct casualty or theft losses of inventory, including goods that you keep on hand for resale to the public:

1. Deduct the loss by adding the amount of your loss to the "cost of goods sold" that you normally report on Schedule C when you figure your business expenses and profits. If you use this method, you can't also claim casualty or theft loss. Also, if you receive any reimbursement for the loss, you have to include that amount in your gross income.
2. Deduct the loss separately by removing the damaged inventory from the Schedule C "cost of goods sold" by making a downward adjustment to opening inventory or purchases. You have to reduce the amount of the loss by any reimbursement you receive (you don't include the reimbursement in gross income).

Reporting the Loss

Casualty losses are usually deductible in the year they occur. However, if the casualty was caused by a federally declared disaster, you may treat the loss as occurring the previous tax year. This enables you to file an amended return for that year and receive a tax refund based on the amount of your deductible loss.

Figure your casualty loss to business property by completing Section B of Form 4684, Casualties and Thefts. Report the loss on Form 4797, Sales of Business Property.