AFTER HURRICANE IAN:
Casualty Losses to Business Property
One of my previous blog posts covered casualty losses to residential property due to a Federally declared disaster like Ian. In this post, I am addressing casualty losses to business properties. The issues are somewhat different for business properties, where, for example, the land and the building on it are considered as separate entities.
Change in Fair Market Value
In general, the amount of casualty loss you can deduct is equal to the fair market value of your property immediately before the casualty, reduced by the fair market value after the casualty – minus whatever you receive as compensation from the insurance company. As a simple example, say your business property was worth $800,000 before Hurricane Ian and only $750,000 afterwards, and the insurance company gives you $40,000 – your possible casualty loss is the difference, $10,000.
One way of determining the loss of fair market value from a casualty event is through an appraisal. Unfortunately, the property is treated as a whole and the change in appraised value may not reflect the loss, for example, of outdoor signage or other features. Improvements to the property like shrubs or other outdoor enhancements are also considered integral parts of the property.
Cost of Repairs or Replacement
A more common way of determining the casualty loss is by basing it on the cost of repairs or replacement. So, if a tree came down on your parking structure and it costs $10,200 to rebuild or replace the structure, your casualty loss is $10,200 – minus anything paid by your insurance.
Keep in mind, to be deductible, repairs must actually be done, may not be excessive, must be necessary to bring the property back to its state before the casualty event, and may not cause the property to be worth more than before.
Business Property Issues
Treasury regulations provide for casualty loss deductions for damaged property “whether or not incurred in a trade or business or in any transaction entered into for profit.” The regulations also specify that the deduction cannot be more than “the amount of the adjusted basis.”
Computing the adjusted basis may be more complicated for business properties. If the business property is totally destroyed, the adjusted basis of the property is considered the amount of loss.
An additional complication for business properties is that casualty loss deductions must be computed based on each single identifiable property separately, meaning the building and the land it is on. This is best illustrated by an example:
• In 1990, Acme Brothers Used Bookstore (not a real company of course) purchased land containing a small building for the lump sum of $90,000. The purchase price is allocated between the land ($18,000) and the building ($72,000) for purposes of determining basis.
• After the purchase, the Acme brothers planted trees and ornamental shrubs on the grounds surrounding the building.
• In 2002, the land, building, trees and shrubs are damaged by a hurricane. At the time of the casualty, the adjusted basis of the land is $18,000 and the adjusted basis of the building is $66,000. At that time the trees and shrubs have an adjusted basis of $1,200.
• The fair market value of the land and building immediately before the casualty is $18,000 and $70,000, respectively. Immediately after the casualty they are $18,000 and $52,000, respectively.
• The fair market value of the trees and shrubs immediately before the casualty is $2,000 and immediately after the casualty is $400.
• In 2003, Acme received an insurance payment of $5,000 to cover the damage to the building.
• The amount of the deduction allowable for the taxable year 2002 is $13,000 for the building and $1,200 for the trees and shrubs, computed as follows*:
Value of property immediately before casualty $70,000
Less: Value of property immediately after casualty $52,000
Value of property subject to casualty $18,000
Less insurance received $5000
Casualty deduction allowable $13,000
Value of trees and shrubs immediately before casualty $2,000
Less: Value of trees and shrubs immediately after casualty $400
Value of property subject to casualty $1,600
Casualty deduction allowable $1,200
* Chart reproduced from webinar “139 Disaster Relief Tax Opportunities,” Wednesday, October 5, 2022, by Karl Mill, JD; Alan Gassman, Esq.; and Kenneth J. Crotty, J.D., LL.M.
A casualty loss is one of the many ways that tax issues for businesses differ from issues for individuals. Your tax accountant is the best resource to evaluate your situation and the many details of business tax returns.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
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