Tax Implications of Disaster-related Personal Casualty Losses
If you suffered a personal casualty loss due to a recent event, you might be entitled to a tax deduction. The deduction is generally available for casualty losses incurred in a federally declared disaster, such as a major hurricane. If you have personal casualty gains, personal casualty losses can still be offset against those gains, even if the losses aren’t incurred in a federally declared disaster.
If you have a deductible loss due to a disaster in a federally declared disaster area, a special rule allows you to claim your allowable write-off in the year before the year the loss actually occurred and thereby get a tax refund. This special deduction timing rule allows you to get some tax-saving relief quickly instead of having to wait until you file your tax return.
You must make the election to claim the write-off in the earlier year no later than six months after the filing deadline (without considering extensions) of your federal income tax return for the year in which the loss actually occurs. The election is made with your original return for the earlier year or on an amended return for that year if you’ve already filed an original return.
What about COVID-19? We have received questions as to whether COVID-19-related losses can be deducted as personal casualty losses. It’s true that on 3/13/20, the viral pandemic was declared a national emergency by President Trump. This means that COVID-19 is technically a federally declared disaster. However, under current law, it may be difficult to claim a pandemic-related personal casualty loss. Although many have lost their jobs due to the virus, a personal casualty loss is not available for lost revenue. Since the revenue has never been recognized, you would have no basis on which to claim a personal casualty loss.
If you own a business, there may be opportunities to claim COVID-19-related casualty losses for that business. For example, a retail business may have produced thousands of T-shirts for an art festival that was cancelled due to COVID-19. In that case, a casualty loss may be appropriate for that inventory. Also, there may be instances where a business (a restaurant, for example) made improvements to a building and was forced to close operations due to the pandemic. This may give rise to a casualty loss for the leasehold abandonment.
These rules are quite complicated, so if you’ve suffered a personal casualty loss, we would be happy to give you more information and answer your questions. We are here to help.
Let us help you in a serious disaster, property that has been stolen, damaged or destroyed by an unexpected event resulting in a gain or loss, contact us today.