“Is hurricane damage tax deductible?” is an important question for businesses and homeowners in hurricane zones. Receiving what you’re entitled to when disaster strikes is a huge help when your home or business premises have suffered damage.
2024 was a notorious year for hurricanes, with Helene and Milton causing billions of dollars of damage. As the clean-up continues, it’s vital to understand how to minimize the financial impact of these increasingly severe natural disasters.
Who Can Claim Tax Deductions for Hurricane Damage?
Homeowners may be able to recover some of the costs resulting from hurricane damage by taking a tax deduction called a “casualty loss.” The casualty loss deduction offers a lifeline to homeowners affected by hurricanes and other extreme weather.
Business owners and real estate investors may also be able to claim a tax deduction for hurricane damage to their properties. In this case, the unreimbursed costs are claimed as a “disaster loss.”
It is estimated that the damages caused by Hurricane Helene alone could run up to $225-250 billion. Getting the help you need to claim a casualty or disaster loss tax deduction is therefore not only a right; it’s a necessity to get your family and business back on their feet.
Get Professional Help
Navigating the complexities of tax rules alone can be frustrating, especially during highly stressful times. That’s why many individuals and businesses affected by hurricanes turn to a professional Florida CPA firm that offers tax planning services to help them work out their eligibility for tax deductions.
An expert in tax planning will help you access every benefit you’re entitled to following a hurricane along with the relevant small business tax strategies and deductions to which you’re always entitled. Tax professionals help you optimize your tax return so you can improve your cash flow and only pay as much tax as you really need to, which is especially critical following a disaster.
What Does the IRS Consider a Casualty Loss?
The IRS considers a casualty loss to be any damage or destruction to your property from a “sudden, unusual, or unexpected event” within a federally declared disaster zone. These events include but aren’t limited to hurricanes.
Individuals and businesses can deduct federal casualty losses not reimbursed by their insurance providers. You can’t use casualty losses or disaster losses as a tax deduction if your insurance fully covers the damage sustained to your property.
Eligibility to Claim a Hurricane-Related Casualty Loss Deduction
You can claim a casualty loss or disaster loss deduction if the damage to your property was caused by a federally declared disaster. You must also be able to prove you own the property for which you’re claiming the deduction.
Get Any Roof Damage Professionally Assessed
It’s important to get a professional roof damage assessment done if you require professional roofing work to be done after a hurricane and your home or business property is in a federally declared disaster area.
Professionals will pinpoint exactly what damage was specifically tied to the disaster event. This information is essential for both your insurance company and federal casualty loss claims.
Can My Business Claim Tax Deductions for Hurricane Damage?
Yes, your business may be able to claim tax deductions for hurricane damage. The term “business” in this case refers to individual businesses, corporations, S corporations, partnerships, and income-producing property.
Disaster losses your business claims must be attributable to a federally declared disaster. The disaster loss must also happen in a county eligible for public assistance. If your business suffers a disaster loss caused by a hurricane, you can claim a disaster loss deduction in the same year as the hurricane or against your tax liability for the preceding tax year.
How to Calculate the Casualty Loss Amount
You must make two different calculations to determine how much you can claim for federal casualty losses for personal-use property. These are the adjusted basis and the decline in the fair market value (FMV) of your property:
- The adjusted basis: Calculate your property’s adjusted basis before the damage occurred. This refers to the amount you initially paid for your property plus any other commissions, taxes, or expenses related to the purchase. The basis of your property either reduces as it naturally deteriorates over time or increases if you make improvements. If you received the property as a gift or through inheritance, you may need to contact a tax professional as calculating the adjusted basis may be different.
- The decline in fair market value: The IRS defines fair market value as the price a buyer would willingly pay for your property on the open market. The decline in fair market value is therefore the difference between what a buyer would pay before and after the damage caused by the hurricane.
When you’ve calculated the adjusted basis and the decline in fair market value, you must choose the lesser amount as your casualty loss. Then subtract any reimbursements or insurance payouts from this amount. The remaining sum will be the total casualty loss deduction you can declare on your tax return.
Disaster losses to business or income-producing property are calculated in the following way:
Adjusted basis – salvage value – reimbursements and insurance payouts
How to Claim a Casualty Loss Tax Deduction
Fill out IRS Form 4684 “Casualties and Thefts” to report your hurricane-related losses. The form explains how to submit your claim step by step. Section A should be completed for damage to personal-use property. Section B is for damage to business-use property.
Keep in mind the following caveats to claiming casualty losses:
- As a homeowner of personal-use property, you must subtract $100 from the casualty loss you report. This does not apply to business or income-producing property.
- You must also subtract 10% of your adjusted gross income from the total of your casualty losses to personal-use property. This also does not apply to business or income-producing property.
- In the case of a qualified disaster loss to personal-use property, the $100 rises to $500 and the 10% AGI reduction amount does not apply.
- You must itemize the casualty losses you submitted on Form 4684 (for both personal-use and business-use property) on Form 1040, Schedule A.
Please note: Federal casualty losses to mixed-use property (such as a personal-use property with an eligible home office) should be divided into two separate deductions according to the applicable damage to each. You can then apply the appropriate reduction to the personal-use part of the loss and declare both losses on the applicable forms.
When to Claim a Casualty Loss on Your Tax Return
Each individual or business owner should consult their tax professional about the most tax-favorable time to claim a casualty loss or disaster loss. You can claim the loss either in the same year as the disaster or for the tax year before the disaster.
In the latter case, you can claim the loss when you file your return for the previous year or submit an amended return. Doing so will likely reduce your taxes or generate a tax refund.
What Happens If Your Property Is Completely Destroyed?
If your business or income-generating property is completely destroyed, the amount of your loss is your adjusted basis minus the expected reimbursement from insurance payouts, salvage value, and any other reimbursements you expect to receive.
Limit Your Losses from Hurricane Damage with a Tax Professional
You or your business may be entitled to tax relief if you’ve suffered losses caused by a hurricane. However, you need to know your way around the relevant tax laws to make the best use of this assistance.
It’s only natural that your tax affairs aren’t a priority in the days, weeks, and months following a natural disaster. That’s why many turn to a tax professional to help them claim casualty and disaster loss deductions and begin to look forward.
