When natural disasters occur, USDA is here to support your operation as you recover. Disaster assistance program payments provide critical support and peace of mind following an extreme weather event, but there are also tax considerations producers should keep in mind. If your farm experiences a disaster there may be special tax provisions that apply to you that are known as “casualty losses”. USDA has partnered with experts to bring producers important tax information on farm tax topics. In the first of a two-part Ask the Expert series on taxes and dealing with disasters, Dr. Tamara Cushing answers questions about defining and determining casualty losses for tax purposes. Dr. Cushing is an Extension Forest Business Specialist from the University of Florida who works in the area of taxation.
For additional information on how USDA disaster payments may impact your taxes visit farmers.gov/taxes, watch the webinar recording on the farmers.gov YouTube channel, or read this article on taxes and disaster payments.
What Qualifies as a Casualty?
Casualty is defined as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Personal and real property generally mean anything someone owns, but what is considered property for casualty loss deduction can depend on your individual circumstances. Work with your tax preparer/your licensed professional to ensure you're itemizing your deductions correctly.
Casualties:
Cannot be gradual or progressive deterioration,
Cannot be anticipated or intended to occur,
Cannot be a day-to-day occurrence from an activity in which the taxpayer is engaged.
A casualty loss can occur from:
- Vehicle or equipment accident
Earthquake
Wildfire
Flood
Freeze
Lightning
Hurricane
Tornado
Terrorist attack
Vandalism
Volcanic eruption
How Can You Determine the Extent of Your Loss?
The owner of the property will need to compare the condition of the property immediately, before and after the event to determine the extent of the loss and whether the amount may be deductible against taxable income. For business use and income-producing property, the loss will be limited to the lesser of the adjusted basis of the property or the change in value due to the casualty. Further limitations will apply to personal use property.
If the damaged property was insured or there is a salvage sale, there may be the possibility of a taxable gain if the insurance reimbursement or sale proceeds are greater than the amount of the deductible loss.
A farm operator can deduct casualty losses that occur in the business of farming. For a loss to be deductible, a taxpayer must show proof that a casualty occurred and have proof of ownership.
As of January 1, 2018, an area must receive a federal disaster declaration by the President for personal casualty losses to be deductible as an itemized deduction.
Personal-use property includes items used by you and your family for non-business purposes. Examples of personal-use property includes your home, furniture, appliances, electronics, clothing, jewelry, automobiles, and other property that are not used in a trade or business.
When a single disaster event such as a fire or tornado involves more than one item of property, separate calculations must be made to determine the loss or possible gain for each business-use item and personal-use item. Once this is completed, the amounts are combined to determine the overall loss or gain for the business-use property and the personal-use property.
How should I report casualty losses?
To report casualty losses correctly, it is important to have and maintain good records. It is also important to list all property that was damaged or destroyed, including its cost or other tax basis, the amount of insurance or other reimbursements, and the fair market value immediately before and after the casualty occurred. This information is needed for both business-use and personal-use property. It is also important to work closely with your income tax advisor to make sure that you take advantage of all the beneficial tax provisions that apply to casualty losses and the postponement of gain that can occur.
Stay tuned for the second part of our Ask the Expert series, where Dr. Cushing will provide tips for reconstructing records after a disaster. More information about taxes and USDA programs is available at Taxes and USDA Programs | Farmers.gov.
Loans and Grants
Disaster Planning and Assistance
Conservation
Ag Business
Farm Life