Tax Rules for Disaster Losses

President Clinton Declares California Disaster Areas.

31 California counties have been declared disaster areas from the storms and flooding that began February 2, 1998.

Here is a list:

Alameda, Amador, Butte, Calaveras, Colusa, Contra Costa, Fresno, Glenn, Humboldt, Lake, Marin, Mendocino, Merced, Monterey, Napa, Sacramento, San Benito, San Francisco, San Juaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Sutter, Tehama, Ventura, Yolo, and Yuba.

Taxpayers who suffer casualty losses in these counties are eligible for special tax breaks and relief.

If you have suffered a disaster, call the IRS for Publication 584, "Casualty and Disaster Loss Workbook," at (800)TAX-FORM.

Special rule for certain disaster losses

A taxpayer who sustains a loss from a disaster in an area subsequently determined by the President of the United States to be a disaster area for federal assistance is eligible for a special rule. The benefit is also available when a personal residence is rendered unsafe by a disaster in a designated area and ordered to be demolished or relocated by the state or local government.

The taxpayer may either (a) deduct the loss on his or her return for the year in which the loss occurred or (2) deduct the loss on his or her return for the preceding tax year.

The election to deduct a 1997 disaster loss in 1996 must be made on or before the due date of the taxpayer's 1997 return (April 15, 1998 for calendar-year individuals, March 16, 1998 for calendar-year corporations.)

The loss may be claimed by filing an amended 1996 return.

The loss is claimed subject to the limitations for casualty losses.

The amount of Casualty Loss

The amount of a casualty loss is the lesser of (1) the difference between the fair market value of the property immediately before the casualty and its fair market value immediately after the casualty or (2) the adjusted basis of the property immediately before the casualty.

When there is damage to different kinds of business property, loss must be computed separately for each single, identifiable property damaged or destroyed. This rule does not apply to nonbusiness property.

$100 Floor for Personal Casualty Loss

The deduction for a personal casualty loss is limited to the amount of each loss in excess of $100. The $100 floor applies separately to each single casualty or theft.

In the case of married taxpayers filing a joint return, only one $100 floor applies to each casualty loss. Married persons filing separate returns must apply the $100 floor amount on each separate return.

If property is used for both personal and business purposes, the $100 floor only applies to the net loss attributable to the portion of the property used for personal purposes.

10% of Adjusted Gross Income Limitation.

After applying the $100 floor for each casualty or theft, the gains and losses from personal casualties and thefts are added together, or "netted." If the recognized gains exceed the recognized losses, all such gains and losses are treated as capital gains and losses. If the recognized losses exceed the recognized gains, all gains and losses are treated as ordinary gains and losses.

The losses in excess of gains are reported as an itemized deduction on Schedule A. 10% of adjusted gross income is subtracted from the net losses in determining the amount of the loss that is deductible. For example, if a taxpayer has $50,000 adjusted gross income and a $6,000 net casualty loss, only $1,000 may be deducted on Schedule A.

If the taxpayer elects to claim a disaster loss in the year preceding the disaster, the 10% of adjusted gross income floor is computed using the adjusted gross income for the preceding year.

Special California Tax Benefits

The California State Board of Equalization has extended emergency tax relief to businesses and property owners who suffered losses as a result of the January and February 1998 storms and flooding in Northern and Central California.

Extension of Due Dates

A one-month extension of the due date for returns and payment of taxes and fees, including sales and use tax and others has automatically been granted to business owners who suffered losses as a result of the storms and floods. Taxpayers should include with their returns a statement made under penalties of perjury giving reasons for late filing.

Property Tax Relief

If authorized by local ordinance, county assessors may recognize a loss in value of property damaged by the storms and flooding, provided the loss exceeds $5,000. Once a reduction in assessed value has been granted, the damaged property will retain its lower value, reducing property taxes, from the date of the disaster until the property is restored, repaired or reconstructed. The lower value may be annually adjusted by an inflation factor not to exceed 2%.

Owners of flood-damaged property who file a claim for reassessment may also apply to the county assessor to defer payment of the April 10 installment of property taxes due. The property tax payment will be due 30 days after a corrected tax bill is issued if a timely claim is filed.

The claim for reassessment and supporting information should be filed within 60 days of the date of the disaster.

Do you need help documenting and claiming your disaster loss? Call Mike Gray at (408) 918-3161 to find out if we are the right CPAs for you.

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Michael Gray, CPA
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San Jose, CA 95128
(408) 918-3162
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