Can or May? Casualty Losses

When I was a kid, Mom or Dad was constantly correcting our use of can/may. "May" was to be used to ask permission and "can" was for questions of ability. I can sleep over at a friend's house because she and, more importantly, her Mom have invited me. Now that I have the ability, I have to get the permission- "May I sleep over?"

There are a lot of IRS Code sections where the taxpayer gets a surprise. They have the government's permission to make a specific deduction (may) but once the rules are applied to the issue, they can't deduct much or anything. For example, the Casualty and Theft Losses deduction. (This one comes to mind today because it is storm season in Kansas. Going home last night, the north end of town was a mess from debris from the afternoon storm. Most of the debris looked to be from someone's metal shed.)

May the shed owner deduct the loss of that shed on their tax return? Yes, IRC sub-section 165 gives them the permission to deduct a particular casualty loss. But can they - probably not. There are a lot of factors that come into play.

• Is this a personal or business loss? A business loss is treated differently and there is a better chance it will be deductible.
• Was there insurance reimbursement? Only what was not reimbursed by insurance is included in the casualty loss. By the way, if insurance paid more than it was worth, you have a gain and that is taxable.
• Lets assume it is a personal loss with no insurance. The taxpayer will start with the lower of the cost of the shed (or basis if it had been depreciated at any time) or fair market value(FMV) at the time of the storm. From this, they will subtract the FMV after the storm.
• Then they will subtract $100 (it was $500 in 2009) from all the losses from that storm.
• Next, all the losses for the year will be combined and 10% of the AGI will be subtracted from the combined total to get the casualty loss...
• ..that now has to go to the Schedule A where it is added the other Itemized Deductions.
• Now if the taxpayer can normally itemize deductions, they're good to go. The Casualty loss adds to taxes, mortgage and charity and it is subtracted from their income
• But if they normally can't itemize, there is a good chance the loss won't help them. It depends if the Casualty loss puts them over the standard deduction.

A Casualty/Theft loss may be deducted but it can't always help you on your taxes.

This was a quick overview, please talk to your tax professional about your specifics.