ARE BUSINESS LOSSES DIFFERENT?
Taxpayers may have more than one loss related to a catastrophic event. Business losses are treated differently than personal losses.
The IRS Form 4684 has two pages. Page one deals with personal losses and page two deals with business and investment property casualty losses.
Personal losses reported on page one are computed in a different manner than business and investment property losses.
For personal losses, the otherwise deductible loss for each event must be reduced by $500 for 2008 and 2009 losses. Further, for non-disaster losses, the total of all losses must be reduced by 10% of adjusted gross income. The second difference is the computation of the loss on each item destroyed or damaged. The Internal Revenue Code does not allow individuals to claim losses in value that are of a personal nature. Therefore, if you have a valuable item that you paid, say $1,000 for three years before the catastrophic loss occurred, at the time of the loss, its fair market value may only be $600. The $600 amount is the limit of the amount that may be included in the computation of the loss (the lower of the actual cost or its fair market value just before the event).
For businesses and investment property, the $500 and 10% of AGI limitations do not apply. Additionally, for many of the assets lost in the category, depreciation has been claimed in past years as part of the normal tax return preparation process. Fair market value is not an issue other than in determining the fair market value of the asset after the event. Assuming the post-event fair market value is zero, the loss is limited only to the remaining cost basis that has not been depreciated.
The problem most small business owners face after a loss, when they are looking for tax relief in the form of tax deductions is the fact that they have already expensed or fully depreciated the assets lost and therefore have no deduction.
I am not going to discuss the special issues of dealing with losses related to inventory in this entry. They have their own considerations that must be dealt with that are different from the issues discussed above.