Casualty Losses Can Provide a 2017 Deduction, but Rules Tighten for 2018

If you suffered damage to your home or personal property last year, you may be able to deduct these “casualty” losses on your 2017 federal income tax return. For 2018 through 2025, however, the Tax Cuts and Jobs Act suspends this deduction except for losses due to an event officially declared a disaster by the President.

What is a casualty? It’s a sudden, unexpected or unusual event, such as a natural disaster (hurricane, tornado, flood, earthquake, etc.), fire, accident, theft or vandalism. A casualty loss doesn’t include losses from normal wear and tear or progressive deterioration from age or termite damage.

Here are some things you should know about deducting casualty losses on your 2017 return:

  • When to deduct:  Generally, you must deduct a casualty loss on your return for the year it occurred. However, if you have a loss from a federally declared disaster area, you may have the option to deduct the loss on an amended return for the immediately preceding tax year.
  • Amount of loss:  Your loss is generally the lesser of (1) your adjusted basis in the property before the casualty (typically, the amount you paid for it), or (2) the decrease in fair market value of the property as a result of the casualty.  This amount must be reduced by any insurance or other reimbursement you received or expect to receive.  If the property was insured, you must have filed a timely claim for reimbursement of your loss.
  • $100 rule:  After you’ve figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It doesn’t matter how many pieces of property are involved in an event.
  • 10% rule:  You must reduce the total of all your casualty losses on personal-use property for the year by 10% of your adjusted gross income (AGI).  In other words, you can deduct these losses only to the extent they exceed 10% of your AGI.

Note that special relief that affects some of these rules has been provided to certain victims of Hurricanes Harvey, Irma, and Maria; and California wildfires.  For details on this relief or other questions about casualty losses, please contact us.

Business Interruption Insurance Can Help Some Companies

Natural disasters and other calamities can affect any company at any time. Depending on the type of business and its financial stability, a few weeks or months of lost income can leave it struggling to turn a profit indefinitely — or force ownership to sell or close. One way to guard against this predicament is through the purchase of business interruption insurance.

The difference

You might say, “But wait! We already have commercial property insurance. Doesn’t that typically pay the costs of a disaster-related disruption?” Not exactly. Your policy may cover some of the individual repairs involved, but it won’t keep you operational.

Business interruption coverage allows you to relocate or temporarily close so you can make the necessary repairs. Essentially, the policy will provide the cash flow to cover revenues lost and expenses incurred while your normal operations are suspended.

Two types of coverage

Generally, business interruption insurance isn’t sold as a separate policy. Instead, it’s added to your existing property coverage. There are two basic types of coverage:

  1. Named perils policies
    • Only specific occurrences listed in the policy are covered, such as fire, water damage and vandalism.
  2. All-risk policies
    • All disasters are covered unless specifically excluded. Many all-risk policies exclude damage from earthquakes and floods, but such coverage can generally be added for a fee.

Business interruption insurance usually pays for income that’s lost while operations are suspended. It also covers continuing expenses — including salaries, related payroll costs and other amounts required to restart a business. Depending on the policy, additional expenses might include:

  • Relocation to a temporary building (or permanent relocation if necessary),
  • Replacement of inventory, machinery and parts,
  • Overtime wages to make up for lost production time, and
  • Advertising stating that your business is still operating.

Business interruption coverage that insures you against 100% of losses can be costly. Therefore, more common are policies that cover 80% of losses while the business shoulders the remaining 20%.

Pros and cons

As good as business interruption coverage may sound, your company might not need it if you operate in an area where major natural disasters are uncommon and your other business interruption risks are minimal. The decision on whether to buy warrants careful consideration.

First consult with your insurance agent about business interruption coverage options that could be added to your current property coverage. If you’re still interested, perhaps convene a meeting involving your agent, management team and other professional advisors to brainstorm worst-case scenarios and ask “what if” questions. After all, you don’t want to overinsure, but you also don’t want to underemphasize risk management.

Potential value

Proper insurance coverage is essential for every company. Let us help you run the numbers and assess the potential value of a business interruption policy.