When a disaster strikes, taxpayers may face significant financial losses. As hurricane season comes to a close and we begin rebuilding from the recent destruction, here’s what you need to know about the rules surrounding disaster losses. 

A casualty loss is defined as damage, destruction, or loss of property resulting from an unexpected event, such as floods, hurricanes, or fires. Under the Tax Cuts and Jobs Act, the disaster losses must be attributable to a federally declared disaster and have been assigned a FEMA code. 

Taxpayers can choose to deduct disaster losses in the year the disaster occurred or in the previous tax year. This can be beneficial for immediate tax relief. To deduct a casualty or theft loss, you must provide proof of the event and the amount lost including ownership of property, the type of casualty, and the loss that was directly caused by the casualty.

Calculating Your Loss

Personal Property | For completely destroyed personal property, calculate your loss by subtracting any insurance reimbursement or expected reimbursement from your adjusted basis. If the property is not completely destroyed, subtract your expected reimbursements from the lesser of a) the property’s adjusted basis before the casualty or b) the decrease in fair market value as a result of the casualty.

Business & Income-Producing Property | Determine the adjusted basis in the property and subtract any salvage value as well as any insurance reimbursements you expect to receive. 

Deduction Limit Rules for Personal-Use Property  

$100 Rule | You must reduce your casualty loss by $100 for each event. This applies even if there are multiple related damages; each loss must be reduced separately. Couples filing separately must each reduce their loss, while couples who file jointly will apply one reduction collectively. The same rule applies to co-owners of property.

10% Rule | After applying the $100 reduction, the total casualty losses are further reduced by 10% of your adjusted gross income. Any reimbursement and the $100 reduction must be applied before calculating the 10% reduction.  

If the loss is from a qualified disaster, the $100 reduction increases to $500, and there is no 10% AGI reduction. For more detailed information, refer to the deduction limit rules chart located on Page 13 of IRS Publication 547. 

Additional Resources

When disaster strikes, various financial resources are available to help individuals and businesses recover. Here are some key options:

• FEMA | The Federal Emergency Management Agency offers grants to eligible individuals and households affected by federally declared disasters to cover essential needs such as temporary housing and home repairs. Click here for additional resources recommended by FEMA. 
• SBA | The Small Business Administration ‘Disaster Loan Program’ is designed to help cover losses not fully compensated by insurance. These loans can be used for repairing or replacing damaged real estate, personal property and equipment. 
• SBDC | The Small Business Development Center provides personalized guidance and local resources to small businesses affected by disaster, assisting with fund access, recovery planning and navigating loan processes. 
• 2-1-1 | Call 2-1-1 for local service referrals, disaster assistance, food, health care and insurance assistance

When hurricane season rolls around, it’s easy to feel like we’re in the eye of a storm— not just with the weather, but with potential financial woes. With the right knowledge about disaster loss deductions, we can weather the financial impacts of these storms. Learn more about IRS Disaster Loss Rules here, and speak with your accountant for personalized advice.