SR Glossary: Business Casualty Losses

Disasters happen.  Unfortunately, something bad can, and probably will, happen to any business operating for a long enough period of time.  However, through proper insurance, and the following guidance, hopefully when a disaster strikes, your business losses will be minimized. 

The following are some key points to keep in mind when faced with trying to calculate a business casualty loss:

  1. If a business asset is completely destroyed then the loss will be the adjusted basis of the asset (the original cost less depreciation taken through the date of loss).
  2. If a destroyed asset was replaced the replacement cost would be required to be capitalized and depreciated over the life of the asset, but may qualify for accelerated depreciation depending on the type of asset purchased.
  3. If the business asset is partially destroyed then the loss is the “lessor of” the adjusted basis or the reduction in the fair market value of the asset before the casualty and the fair market value of the asset after the casualty.
  4. In order to substantiate the reduction in the fair market value due to the disaster an appraiser would have to value the assets at both moments in time.  An appraisal could cost significant dollars, but keep in mind that whether fully or just partially damaged the loss cannot be greater the adjusted basis in the asset.
  5. If you can repair the damaged asset with minimal costs and the repairs do not increase the fair market value of the asset greater than before the casualty, then these costs would be considered part of the casualty loss and deductible in the year of the loss.  Note:  that any loss taken due to a reduction of the fair market value would require a reduction of the adjusted basis going forward.
  6. Any insurance proceeds received would reduce the loss.

For further guidance on this issue, we have included two short documents from the IRS that summarize the main issues and rules as they relate to casualty losses, here and here.  Please do not hesitate to contact one of our dedicated tax professionals if you experience a casualty loss and would like to discuss your specific situation further.