Disaster Recovery Casualty Losses and Record Reconstruction

1. Disaster RecoveryCasualty Losses and Record Reconstruction For Individuals and Small Business Owners

2. Presented by David Kropp Senior Tax Specialist Taxpayer Education and Communication Area 5: San Diego Territory San Bernardino Office

3. To Prove a Loss • You must be able to show all of the following: • The type of casualty and when it occurred. • That your loss was a direct result of the casualty. • That you owned the property or, if leased, that you are contractually liable for the damage/loss. • Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.

4. To Prove a Loss • Records may have to be reconstructed. • The information gathered will be used for tax purposes, as well as insurance reimbursement. • Remember for insurance reimbursement, FEMA and SBA aid, the more accurate the estimate of loss, the more loan and grant money will be available.

5. Tax Records • Immediately after the casualty file Form 4506 to request copies of the previous four years’ income tax returns. • The fee is waived if you were affected by the recent wildfires. Write “CA Wildfires” in red at the top of F4506 to expedite processing and waive the fees. • Copies of tax returns and information return transcripts may also be obtained from your local IRS counters in emergency and disaster situations.

6. Initial Activities After Event • Be sure to take photographs as quickly as possible after the casualty to establish the extent of damage. • Contact the title company, escrow company or bank that handled the purchase for copies of the escrow papers. • Use your current property tax statement for land vs. building ratios. If not available contact the county assessor’s office. • Check with a local appraisal or real estate companies for a list of comparable sales to determine the fair market value within the same neighborhood.

7. Improvements to Your Home • Get written accounts from friends and relatives who saw the house before and after any improvements. • Try to locate photos of electronics, computers, appliances, clothing, jewelry, collectibles, etc. • If a loan was obtained for improvements, contact the institution for documentation to help reconstruct the cost of improvements. • For inherited property check court records for probate values. • Check with the county assessors office for old records about the property. • Copy of the deed for the property.

8. Improvements to your home • If the home was custom built contact the contractor to see if records are available. • Most insurance policies list a value of the building to establish a base figure for replacement value insurance.

9. Vehicles • Kelly Blue Book • Contact dealer for a copy of the contract. If unavailable give the dealer facts about the vehicle for a comparable price figure • Use newspaper ads for the period in which the vehicle was purchased to determine the cost. • For reconstruction of vehicle mileage contact your dealer or repair location for repair records.

10. Personal Property • Make a diagram or floor plan of the home and include where furniture was placed. Also include any bookcases, where pictures were located and shelves including personal items. • Reconstruction the original cost through old department store catalogs. Fair Market Value can be determined through local thrift stores, local news papers and the library.

11. Reconstruction of Business Records • Inventories – get copies of invoices from suppliers (invoices should date back at least one year). • Income – get copies of bank statements • Obtain copies of last year’s business returns (IRS, FTB, EDD and business license). • Furniture & Fixtures – prepare a diagram or floor plan of the business location including equipment, where inventories were located as well as the outside area of the location. Check with insurance carrier for specific policy riders.

12. Reconstruction of Business Records (cont.) • If you purchased an existing business, contact the broker for a copy of the purchase agreement. This should detail out what was acquired. • If the building was constructed, contact the contractor for building plans, or the city/county planning commissions for copies of plans.

13. Reconstruction of Business Records (cont.) • Publication 584 and 584B contain worksheets that take an individual or business owner through their home and/or business. • Contains lists of items that might have been lost. • Helps jog memory.

14. Losses • To determine loss: • Determine adjusted basis. • Determine Fair Market Value (FMV). • From the smaller of the adjusted basis or FMV: • Subtract any insurance or other reimbursement received.

15. Losses • Other Reimbursements: • Employer’s emergency disaster fund. • Cash gifts. • Insurance payments for living expenses. • Federal loans later forgiven. • Qualified disaster relief payments. • Disaster relief grants.

16. Losses • Presidentially declared disaster area: • No gain is recognized on any insurance proceeds received for “unscheduled” personal property that was part of the contents of a main home. • Section 1033(h)

17. Losses • Presidentially declared disaster area: • Payments for the home and any scheduled property is treated as one payment. Any of this money used to replace any type of replacement property is not recognized gain (detailed later). • Section 1033(h)

18. Losses • All individual losses are subject to: • 2% AGI limit if used for business by employee. • $100 “deductible” per owner (unless MFJ) per loss. • 10% AGI limit per owner (unless MFJ) per year.

19. Losses • Business losses are not subject to the individual limits.

20. Losses • Presidentially declared disaster area: • Disaster relief payments or assistance do not reduce casualty loss unless they replace lost or destroyed property. • Disaster unemployment payments are unemployment and are taxable. • Disaster grants are generally not included in income.

21. Losses • Included in Income: • Temporary living payments from insurance that are in excess of the actual increase in temporary expenses are income. • Include on line 21.

22. Losses • Example: Lost use of residence for one month. • Normal Rent: $600 • Normal Food: $300 • Motel: $1000 • Food: $500 • Received from Insurance $1500.

23. Losses • Example: Lost use of residence for one month. • Total Normal Expenses: $900 • Total Temporary Expense: $1500 • Increase is $600 • Include $900 of the $1500 insurance in income on line 21.

24. Gains on Casualty “Losses” • If you receive an insurance payment or other reimbursement in excess of the adjusted basis of damaged or destroyed property you will have a gain. • Gain is: • Amount received minus • Adjusted basis

25. Gains on Casualty “Losses” • If your main home is destroyed and the insurance proceeds result in a gain: • You can treat this as a sale of residence subject to the same rules. • If the home was not used or owned for 2 of the last five years a reduced maximum gain exclusion will apply.

26. Gains on Casualty “Losses” • You can postpone any “recognized” gain on your main home if you buy a new home within 4 years of the end of the year the disaster occurred. • You can recognize the gain and report it.

27. Gains on Casualty “Losses” • You do not have to recognize gain on destroyed/damaged business property if it is replaced within two years of the end of the tax year in which gain is realized. • If received payment in 2003 resulting in gain must replace property prior to 1/1/2006 to defer gain.

28. Gains on Casualty “Losses” • You cannot postpone gain if you buy replacement property from a related party. Applies to: • C Corps • Partnerships in which more than 50% of the capital or profits is owned by a C Corp • All others if the total realized gain for the year is over $100,000.

29. Gains on Casualty “Losses” • To defer gain: • You must buy property specifically to replace the damaged or destroyed property in order to defer gain.

30. Gains on Casualty “Losses” • Basis of replaced property will be: • Adjusted basis of property being replaced.

31. Gains on Casualty “Losses” • Basis of repaired property will be: • Adjusted basis of property • Minus insurance or other reimbursement • Minus deductible loss • Plus costs to restore/repair property • If basis increases this is the gain

32. Reporting Casualty Gains/Losses • Report loss on return for year it occurred. • Since the fires were a federally declared disaster, can amend prior year return. • Election to amend must be made by: • Due date of 2003 return or • Due date of 2002 return (with extensions).

33. Reporting Casualty Gains/Losses • Once election made, can revoke within 90 days of making election. • Must return any refund or credit received from making the choice. • If revoked prior to getting refund must return refund within 30 days of receiving it for revocation to be effective.

34. Reporting Casualty Gains/Losses • Individual Returns: • Losses go on Form 4684 and carry to Schedule A. • Gains go on Form 4684 and carry to Schedule D. • Includes losses on income-producing property and property used in performing services as an employee (held less than one year).

35. Reporting Casualty Gains/Losses • Business and income producing property: • Losses are reported on Form 4684 and carry to various forms. • Business use of home carries to Form 8829. • Other business property carries to Form 4797.

36. Reporting Casualty Gains/Losses • Rental Properties: • Report on Form 4684 and then on Form 4797. • Have 2 years from close of tax year where you realize gain to replace property and defer gain. • Losses are not limited by Form 8582.

37. Reporting Casualty Gains/Losses • Insurance Reimbursement after filing: • If less than expected (and accounted for on casualty loss) include difference as loss on return for year when you can reasonably say you’re not getting any more money.

38. Reporting Casualty Gains/Losses • Insurance Reimbursement after filing: • If greater than expected (and accounted for on casualty loss) include difference as income in the year received.

39. Net Operating Losses • Individual or Business casualty losses can generate Net Operating Losses. • Publication 536, Net Operating Losses (NOLs) for Individuals, Estates and Trusts, covers NOLs for individuals.

40. Net Operating Losses • NOLs generated by casualty losses can be carried back or forward the same as any other NOL.

41. What is not included: • Losses do not include: • a reduction in profits or • loss of income.

42. Extended Deadlines • The FTD Penalty Waiver Period for employment and excise tax deposits was Oct. 21 - Nov. 7, 2003. • The Extension Period for returns and other tax payments is Oct. 21 through Dec. 29, 2003. • The Disaster Designation for this area is “CA Wildfires” in red at top of forms. • The disaster area counties are: Los Angeles, Riverside, San Bernardino, San Diego and Ventura.

43. Extended Deadlines • IR-2003-126: • Oct 28, 2003 was initial declaration • Updated Nov 03, 2003 to include Riverside County • Updated Dec 05, 2003 to end incident

44. Thank you! Any Questions?