As the Kincade Fire roared through Sonoma County, we are again faced with a fire’s impact. This time there are fewer homes and structures lost. Much of the impact has been in rural and less populated areas. Yet there are still too many of us who have lost property and our homes.
As business owners, we experienced business interruptions and loss of revenue. Many businesses were in evacuation zones. Others were in areas without power and lost perishable items, access to servers or an inability to manufacture or ship orders to clients.
Business losses are deductible as a regular business loss and as a casualty loss. Deductions for lost sales depends on your accounting methods. Give us a call for assistance in determining what is deductible for you.
Insurance proceeds received for a loss of business due to business interruption, inability to open your business, or deliver your product because power was shut off are considered additional gross receipts and will be included in your 2019 gross income. Any additional expenses that you incurred are deductible. For instance, if you continued to pay your employees during the wildfire or power shutoff, the payroll expenses continue to be deductible.
Reporting of casualty losses has changed since 2017. Under Federal tax reform, personal casualty losses are allowed only if there is presidentially declared disaster. Business losses including business property losses are still deductible against Federal and California taxable income.
However, California continues to allow casualty losses if the Governor declares a State of Emergency for both personal and business taxpayers. The Governor declared a State of Emergency for the Kincade Fire on October 23, 2019.
Here are few facts to note regarding casualty losses, insurance proceeds and other reimbursements received to compensate for loss:
- You may be entitled to deduct losses you incur on your tax returns. For California, unreimbursed personal property losses may be deducted on your 2019 tax returns when you file next spring, or you may amend your 2018 tax returns and claim the loss now to speed up your refund. It is important to evaluate both options because the amount of an allowable loss may differ between the two years due to adjusted gross income limitations for any non-business casualty losses incurred.
- Business assets lost due to the fire need to be treated differently and separately from non-business losses. The rules regarding business assets lost or damaged due to casualty are significantly different from the rules which govern loss or damage to personal items and may be deductible on both your Federal and California tax return.
- Some assets may have both business use and personal use, such as a home office, personal vehicles used in your business, or a rental of a granny unit at your home. In those cases, the losses are split as if they are separate assets and separate losses. Consult with your tax advisor to correctly do this.
- Unreimbursed losses are limited to the adjusted tax basis or the decrease in the fair market value of the item immediately prior to the loss, whichever is less.
- The amount of your loss can be quantified in different ways. One way is to compare an appraisal before and after the loss. Secondarily, you can use the actual cost to replace the lost or damaged item to determine the loss.
- The reimbursement for items lost in the fire can result in taxable income. If a business asset lost is not replaced within 2 years, then the item lost is treated as having been sold to the insurance company for the reimbursement received. The taxable gain is the difference between the reimbursements received less the tax basis of the assets.
- Temporary living expenses provided by your insurance company are not taxable to you as long as they are actually used to pay for temporary living expenses. However, if you are given $4,500 to rent a comparable space, but choose to rent something less expensive and keep the rest for other expenses, you are required to report the difference as taxable income.
This is an extraordinarily stressful time. Be careful to consider your options carefully and do not rush into hasty decisions which may be affected by the fact that you have just gone through a horrible trauma. On the other hand, do not wait too long to begin rebuilding.
Your CPA can help you with these issues. Contact your accountant if you have questions about your personal situation.