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Learn the tax lay of the land, and turn casualty losses into tax gains

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in Small Business Tax,Small Business Tax Deduction Strategies

If you fall prey to a natural disaster or some other casualty—including theft—you may be able to write off some of your financial loss. And with the right tax moves, you’ll get an even bigger deduction.

For starters, tax law doesn’t place limits on damage to business property. So, you can write off 100 percent of business-casualty losses that insurance or other aid doesn’t cover.

On the other hand, if your personal property is damaged, you can only deduct casualty and theft losses that exceed 10 percent of your adjusted gross income (AGI) after you subtract $100 for each casualty or theft event.

Example: Let’s say a fire damages your home and your AGI is $100,000. If you suffer a $25,100 loss, you can write off $15,000, saving $4,200 in tax in the 28 percent tax bracket. The calculation:

Amount of loss $25,100

Less per-event floor ($100)

Tentative deduction $25,000

Less 10 percent of AGI ($10,000)

Allowable deduction $15,000

Reminder: Before you deduct any losses, you must subtract insurance reimbursements, government benefits and $100 for each occurrence.

Boost your tax payoff when you suffer a loss with these strategies:

  • Combine all your misfortunes. At tax-filing time, you can add together theft losses and casualty losses on Form 4684 (Casualties and Thefts). Find a copy of the form at www.irs.gov/pub/irspdf/f4684.pdf. So, if your house absorbed damage from a hurricane and you’re already over the10 percent-of-AGI threshold, you also can deduct the value of a $1,000 watch stolen the same year.
  • Ensure that you can justify your losses. When you report a casualty loss on your tax return, you must prove the amount you’re claiming. The deduction is limited to whichever is lower: the decrease in the property’s value as a result of the disaster or your adjusted basis in the property. Your adjusted basis is reduced by depreciation deductions and increased by the improvement costs.
  • Build a file to support your case. Include newspaper reports, before-and-after photos, insurance assessments, deeds and receipts showing that you own the damaged property. Secure a written appraisal, if necessary.

To qualify for a deduction, you must prove that your loss resulted from a “sudden, unexpected or unusual” event.

  • Maximize benefits in a federal disaster area. In the wake of some catastrophes, the president declares entire regions disaster areas that are in need of federal assistance. Take advantage of a special rule if this happens to you: You can amend your tax return from the prior year to deduct the casualty loss.

You don’t have to wait to file your 2006 return to benefit from a disaster area casualty loss occurring this   year. Typically, you can expect to collect a refund in about 45 days.

  • Pile up business deduction losses. The 10 percent-of-AGI threshold doesn’t apply if disaster strikes your business. You can deduct whatever you spend to replace or repair damaged property on your company’s tax return.

Key point: Business losses don’t have to happen as a result of a sudden, unexpected or unusual event. So, you have a lot more leeway to deduct losses.

  • Don’t forget about incidental expenses. After a disaster, you might have to pay for appraisals or photos to prove the amount of your loss. You can deduct those expenses as miscellaneous itemized deductions on your Form 1040, subject to the usual 2 percent-of-AGI threshold.

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