The one area of taxes that has not been discussed is whether people can take casualty losses in 2020-2021.
There are distinctions between personal losses and business losses. With the entire nation designated a “PDA” (Presidential Disaster Area), many businesses were shut down by governors where the tenants or owners were unable to use their space, unable to see customers, or their properties may have been simultaneously contaminated by infected persons.
For example, if you owned a medical property or restaurant, and the state closed you down for 4 weeks, then you were displaced for 1/12th of the year. How do you value that displacement and loss? If you had business interruption insurance, you may actually have some type of coverage for the loss of use, but if you don’t, then you may need to add up your business losses to report on your taxes.
In general, business casualty and theft losses are fully deductible, regardless of whether the damage occurred in a federal disaster area. Some losses can also be carried forward.
However, if you do not have business interruption insurance, then what? Everyone that uses tax software knows that the non-business casualty loss provisions were changed under President Trump. Going forward, you cannot take a personal casualty deduction very easily unless there is a disaster declared. To have a disaster declaration, a governor must make the request to the President under the Stafford Act. If it is approved, taxpayers in the area of disaster receive great tax benefits for that tax year. If a national disaster, then everyone can claim personal losses subject to the IRS limitations.
Overall, if we can legally quantify these losses, we may actually have a big personal as well as business casualty loss:
- Loss of Income
- Loss of Rent
- Loss of customers
- Expenses paid while a taxpayer can’t use the facilities.
- Costs to repair the property.
A casualty loss is a loss that an individual taxpayer suffers as a direct result of an event that meets the following criteria:
- It is identifiable;
- It is damaging to property; and
- It is sudden, unexpected and unusual in nature.
- Generally, casualty losses are deductible during the taxable year that the loss occurred.
Further, casualty losses seem to offset gains, and a casualty loss deduction tends to be allowable to the extent that the taxpayer is not otherwise compensated for the loss by insurance or reimbursement.
Self-employment tax – Self-employed taxpayers will also need to consider whether to take a business casualty loss that affects inventory in the current or prior year since the loss may offset self-employment tax as well as income taxes.
The TCJA “new tax code” eliminates personal casualty loss deductions for 2018 through 2025, except for losses sustained in a federal disaster area. Thus, the key is to find a CPA who knows how to quantify real losses that are not covered under the insurance policies. However, losses under the TCJA may still be subject to the limit based on 10% of AGI and the $100-per-event reduction.
Moreover, the TCDTRA Taxpayer Certainty and Disaster Tax Relief Act provides help to taxpayers for casualty losses in federally designated disaster areas occurring in 2018 through January 19, 2020. More important, this law temporarily removed the limitations of losses to: 10% of a taxpayer’s AGI Adjusted Gross Income and opened up the deduction opportunity to non-itemizers. It may have also bumped up the per-event reduction from $100 to $500.
On March 13, 2020, President Donald Trump declared a nationwide emergency under the Stafford Act. This declaration would apply to all 50 states along with the District of Columbia. Before this expansive national declaration, there were some states and cities that had specific designations.
Now, the assumptions begin. What methods of quantifying damage will be allowed? Will individuals or businesses be able to take deductions on lost income, lost use of property, and so forth. How do people discern between some business and personal losses?
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) re instituted the carry forward of losses, allowing taxpayers to carry 100% of NOL Net Operating Losses backward or forwards according to Legal Zoom. With COVID-19, businesses may be able to claim the loss of income against past or future tax filings. Also, individuals may also claim deductions for personal or family healthcare expenses which exceed 7.5% of their adjusted gross income in 2019.
As for rioting and protesters, people may also be able to claim those business and personal losses also if the President helps out the governors with a disaster declaration. However, insurance companies may end up suing governors and mayors for not mitigating losses from the riots, arson, and personal injuries.
Only time will tell how to handle these deductions as the IRS, CPAs and Tax Lawyers reach practical tax filing guidelines. In the end, most taxpayers according to Investopedia, will calculate personal losses above any insurance payments, and apply it to their tax software and tick the box for PDA Presidential Disaster Area. Otherwise, losses will be calculated and added to their losses on schedule C’s, partnership or corporate business tax returns. With some luck, most small businesses and others who were shut down, will be able to capture losses and get a larger refund on their 2020 taxes in 2021.
Disclaimer: Please see a CPA or licensed tax lawyer before making any important financial or tax decision. You can always call the IRS to discuss with them also.
George Mentz JD MBA CWM Chartered Wealth Manager ® is a licensed attorney and CEO of GAFM ® global education, which is an ISO 29990 Certified professional development company operating in over 50 nations. Mentz is an award-winning author and advisory board member to several companies around the world in education, charities, and FinTech Companies.
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