Emergency Declaration Makes Losses From Ian Deductible

Prior to Hurricane Ian making landfall, President Biden issued a federal emergency declaration for the State of Florida. A federally declared disaster is a prerequisite to the deductibility of a casualty loss, and the declaration served to unlock deductibility of losses resulting from the storm.

Affected taxpayers have the option of claiming disaster-related casualty losses on their federal income tax returns for either 2022 or 2021. If you need a tax refund to restore or replace your property, you may be able to get cash faster by claiming the casualty loss on an amended 2021 return rather than waiting for the 2022 filing season. The IRS expedites processing of amended returns notated with the appropriate disaster information; the refund is issued generally within 60 days.

Casualty losses are claimed on Form 4864, “Casualties and Thefts.” Affected taxpayers claiming the disaster loss should put the disaster designation "FL Hurricane Ian" in bold letters at the top of the form and include the FEMA disaster declaration number “DR-4673-FL.” If you opt to claim the loss in 2021, you must file Form 1040-X “Amended U.S. Individual Income Tax Return” if you have already filed your original 2021 return.

Measuring your loss

It can be challenging to measure your loss. The IRS defines the amount of the loss as the lesser of (1) your adjusted basis in the destroyed property, and (2), the decline in fair market value from before to after the casualty:

  • Your adjusted basis in the property depends on how you acquired and subsequently used the property. Your original basis is typically what you paid for the property, but it is adjusted, up for improvements or down for depreciation you have claimed. If you acquired the property by gift or inheritance, special rules apply, and you should speak with a tax advisor.
  • Fair market value is the price you could get from a willing buyer in the open market. Fair market value is not easily determined for some assets.
  • Once the loss is measured, any insurance or other reimbursement you received, or that you expect to receive, must be subtracted from the otherwise deductible amount. Food, medical supplies, and other forms of assistance you received do not reduce your casualty loss, unless they are replacement for lost or destroyed property.

    If you receive a reimbursement greater than your adjusted basis in the destroyed property, you might have a tax gain. You may have options to mitigate the tax liability associated with the gain, so it is important to seek tax advice as soon as practicable.

    Limitations

    Casualty losses are typically subject to a per-casualty limitation as well as a limitation based on your adjusted gross income. The limits have been waived in the past for other declared disasters, but we are still waiting for guidance regarding how these limitations will apply to Hurricane Ian. We will provide updates as they become available.

    If you have a casualty gain or loss resulting from Hurricane Ian, and need help filing the appropriate forms or determining your gain or loss, please consult an HBK Tax Advisor.

    About the Author(s)
    Jesse Hubers is a Manager with the HBK Tax Advisory Group in the Naples, Florida office of HBK CPAs & Consultants. He specializes in taxation of corporations and partnerships including formations, reorganizations, liquidations, mergers, acquisitions, and divisions. He also has expertise in like-kind exchanges including deferred exchanges and “drop-and-swap” exchange. Jesse can be reached at 239-263-2111 or by email at jhubers@hbkcpa.com.
    Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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