Casualty Losses and Form 4684: Federal Disaster Relief, Section 1033 Involuntary Conversions

Description

Although the Tax Act of 2017 eliminated personal casualty loss deductions for the years 2018-2025, business casualty losses remain deductible, and personal losses within federally declared disaster areas remain deductible. The Stafford Act expanded opportunities for loss deductions under IRC Section 165(i) by declaring the entire United States a federal disaster area due to COVID-19. On top of COVID-19 relief, there are four pages of federally declared disaster areas relative to the California wildfires alone and additional disaster area designations for severe storms, hurricanes, earthquake relief, etc., across the nation.

Defining what constitutes an eligible loss is not clear since 165(i) was written with hurricanes, fires, and earthquakes in mind and before the national pandemic. What is clear is that certain losses from vandalism, inventory loss, and other permanent damages are deductible and, under these new guidelines, can be deducted in the year proceeding COVID or for the 2020 tax year.

Tax practitioners continue to struggle with the calculations of the deductible portion of losses from these life-altering events. Insurance proceeds, settlements, and other relief received rightly alter the deductibility of losses. Calculating depreciation and the basis of the replacement property and preparing Form 4684 provide additional challenges as well.

Listen as Lawrence K.Y. Pon, CPA/PFS, CFP, EA, USTCP, AEP at Pon & Associates, explains eligibility for this deduction, calculating deductible losses, and timing the deduction of these benefits. Tax advisers need to understand what is known about available disaster relief for losses caused by COVID-19 and grasp existing rules for the deductibility of these losses to obtain maximum tax savings for individuals and businesses struggling to survive and recover from recent disasters.