Lessons from the Tax Court: Accidents happen

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in Small Business Tax,Small Business Tax Deduction Strategies

The tax law permits you to deduct a casualty loss, within certain limits, for damage caused by an event that is “sudden, unexpected or unusual.” This often results from natural disasters like hurricanes, earthquakes and tornadoes, but you may also deduct losses from more mundane occurrences, such as traffic accidents. 
  
Can you still deduct a casualty loss for damage to your vehicle if you caused the accident? It depends. A new Tax Court case shows how the law may be interpreted. 

Facts: A taxpayer arranged to be driven home from a party where he had been drinking. Later in the evening, he decided he was sober enough to drive elsewhere. When his vehicle slid off the road and crashed, his blood-alcohol reading was slightly above the legal limit, so he was arrested for drunken driving. His insurance company denied the claim due to the arrest.

But the Tax Court permitted a casualty loss deduction because it said he tried to act reasonably. Note: If the taxpayer had driven directly home from the party when his blood-alcohol level was higher, the court said the deduction would have been denied. (Rohrs, TC Summary Opinion 2009-190)

Note that you can deduct personal casualty losses only to the extent your unreimbursed losses exceed 10% of your adjusted gross income (AGI) after subtracting a special “floor” for each event. For the 2009 tax year, the floor is $500. Example: Your AGI is $100,000 and your car was totaled in an accident last year. If your loss, after insurance reimbursements, was $15,000, the casualty loss deduction on your ’09 return is limited to $4,500 ($15,000 minus $500 floor minus 10% of AGI = $4,500).

Tip:
As it was prior to 2009, the floor for casualty losses returns to $100 per event for 2010.

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