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Pull a casualty loss out of a tax tailspin

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in Small Business Tax,Small Business Tax Deduction Strategies

Say your spouse damages his or her car this winter when it skids off an icy road. It will cost you $3,000 after insurance to repair it. The accident qualifies as a “sudden, unexpected or unusual” event that could result in a casualty loss deduction on your tax return.

However, due to the personal casualty loss limits, it’s unlikely that you will be able to deduct any repair costs.

Strategy: Start using the damaged car for business driving. Then you can claim a casualty loss for the car, even though your spouse was using it personally at the time.

Here’s the whole story: The IRS limits the deduction for personal casualty losses to the excess above 10 percent of your adjusted gross income (AGI), after subtracting a $100 “floor” per event. For example, if your AGI is $100,000, the deductible loss of $2,900 ($3,000 less $100) falls far short of the 10 percent figure ($10,000). So, you reap no tax benefit.

But, there’s no AGI limit for business casualty losses. By using the car extensively for business, you should be able to deduct most of the unreimbursed repairs.

In this case, you might switch the car you normally use for business driving with your spouse’s personal car. Let’s assume your business use of your spouse’s car for 2007 ends up at 80 percent after switching in February. That means you can deduct $2,320 of the repairs (80 percent of $2,900).

Tip: The tax law permits you to use more than one business car in a year. So, you can also claim deductions for your other car in 2007, to the extent it’s used for business driving.

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