Publication 547 - Casualties,disasters,and Thefts

Table 1. Reporting Loss on Deposits

Figuring a Loss

IF you choose to report the loss as a(n)...

THEN report it on...

To determine your deduction for a casualty or

Casualty loss

Form 4684 and Schedule A

theft loss, you must first figure your loss.

(Form 1040).

Ordinary loss

Schedule A (Form 1040).

Amount of loss. Figure the amount of your

loss using the following steps.

Nonbusiness bad debt

Schedule D (Form 1040).

1) Determine your adjusted basis in the

•

property before the casualty or theft.

Robbery.

How to report. The kind of deduction you

choose for your loss on deposits determines

2) Determine the decrease in fair market

The taking of money or property through fraud or

how you report your loss. See Table 1.

value (FMV) of the property as a result of

misrepresentation is theft if it is illegal under

the casualty or theft.

state or local law.

More information. For more information, see

3) From the smaller of the amounts you de-

Special Treatment for Losses on Deposits in

Mislaid or lost property.

The simple disap-

termined in (1) and (2), subtract any insur-

Insolvent or Bankrupt Financial Institutions in

pearance of money or property is not a theft.

ance or other reimbursement you

the instructions for Form 4684.

However, an accidental loss or disappearance

received or expect to receive.

of property can qualify as a casualty if it results

For personal-use property and property used in

from an identifiable event that is sudden, unex-

Deducted loss recovered. If you recover an

performing services as an employee, apply the

pected, or unusual. Sudden, unexpected, and

amount you deducted as a loss in an earlier

deduction limits, discussed later, to determine

unusual events were defined earlier.

year, you may have to include the amount recov-

the amount of your deductible loss.

ered in your income for the year of recovery. If

Example.

A car door is accidentally

any part of the original deduction did not reduce

Gain from reimbursement. If your reim-

slammed on your hand, breaking the setting of

your tax in the earlier year, you do not have to

bursement is more than your adjusted basis in

your diamond ring. The diamond falls from the

include that part of the recovery in your income.

the property, you have a gain. This is true even if

ring and is never found. The loss of the diamond

For more information, see Recoveries in Publi-

the decrease in the FMV of the property is more

is a casualty.

cation 525.

than your adjusted basis. If you have a gain, you

may have to pay tax on it, or you may be able to

postpone reporting the gain. See Figuring a

Gain, later.

Loss on Deposits

Proof of Loss

Business or income-producing property.

If you have business or income-producing prop-

A loss on deposits can occur when a bank, credit

To deduct a casualty or theft loss, you must be

erty, such as rental property, and it is stolen or

union, or other financial institution becomes in-

able to show that there was a casualty or theft.

completely destroyed, the decrease in FMV is

solvent or bankrupt. If you incurred this type of

You also must be able to support the amount

not considered. Your loss is figured as follows:

loss, you can choose one of the following ways

you take as a deduction.

to deduct the loss.

Your adjusted basis in the property

•

As a casualty loss.

Casualty loss proof. For a casualty loss, you

MINUS

•

should be able to show all the following.

As an ordinary loss.

Any salvage value

•

The type of casualty (car accident, fire,

As a nonbusiness bad debt.

MINUS

storm, etc.) and when it occurred.

Any insurance or other reimbursement you

•

The loss you can deduct as an ordinary loss is

That the loss was a direct result of the

receive or expect to receive

limited to $20,000 ($10,000 if you are married

casualty.

filing separately) and applies only if the financial

•

Loss of inventory. There are two ways you

That you were the owner of the property,

institution is not federally insured.

can deduct a casualty or theft loss of inventory,

or if you leased the property from some-

including items you hold for sale to customers.

Casualty loss or ordinary loss. You can

one else, that you were contractually liable

One way is to deduct the loss through the

choose to deduct a loss on deposits as a casu-

to the owner for the damage.

alty loss or as an ordinary loss for any year in

increase in the cost of goods sold by properly

•

Whether a claim for reimbursement exists

which you can reasonably estimate how much of

reporting your opening and closing inventories.

for which there is a reasonable expecta-

your deposits you have lost in an insolvent or

Do not claim this loss again as a casualty or theft

tion of recovery.

bankrupt financial institution. The choice gener-

loss. If you take the loss through the increase in

ally is made on the return you file for that year

the cost of goods sold, include any insurance or

and applies to all your losses on deposits for the

Theft loss proof. For a theft loss, you should

other reimbursement you receive for the loss in

year in that particular financial institution. If you

be able to show all the following.

gross income.

treat the loss as a casualty or ordinary loss, you

The other way is to deduct the loss sepa-

•

When you discovered that your property

cannot treat the same amount of the loss as a

rately. If you deduct it separately, eliminate the

was missing.

nonbusiness bad debt when it actually becomes

affected inventory items from the cost of goods

•

worthless. However, you can take a nonbusi-

That your property was stolen.

sold by making a downward adjustment to open-

ness bad debt deduction for any amount of loss

ing inventory or purchases. Reduce the loss by

•

That you were the owner of the property.

that is more than the estimated amount you

the reimbursement you received. Do not include

•

deducted as a casualty or ordinary loss. Once

Whether a claim for reimbursement exists

the reimbursement in gross income. If you do

you make the choice, you cannot change it with-

for which there is a reasonable expecta-

not receive the reimbursement by the end of the

out permission from the Internal Revenue Serv-

tion of recovery.

year, you may not claim a loss to the extent you

ice.

have a reasonable prospect of recovery.

It is important that you have records

Leased property. If you are liable for casu-

Nonbusiness bad debt. If you do not choose

that will prove your deduction. If you do

alty damage to property you lease, your loss is

to deduct the loss as a casualty loss or as an

not have the actual records to support

the amount you must pay to repair the property

ordinary loss, you must wait until the actual loss

RECORDS

your deduction, you can use other satisfactory

minus any insurance or other reimbursement

is determined before you can deduct the loss as

a nonbusiness bad debt.

evidence to support your deduction.

you receive or expect to receive.

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Publication 547 - Casualties,disasters,and Thefts - 2002 Page 3

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