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Free 1040x 6. Free 1040x   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Free 1040x However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Free 1040x This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Free 1040x This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Free 1040x However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Free 1040x If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Free 1040x For more information, see chapter 2. Free 1040x Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Free 1040x These lines are reproduced below and are explained in the discussion that follows. Free 1040x 35 Inventory at beginning of year. Free 1040x If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. Free 1040x Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. Free 1040x Subtract line 41 from line 40. Free 1040x  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Free 1040x If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Free 1040x Opening inventory usually will be identical to the closing inventory of the year before. Free 1040x You must explain any difference in a schedule attached to your return. Free 1040x Donation of inventory. Free 1040x   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Free 1040x The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Free 1040x You must remove the amount of your contribution deduction from your opening inventory. Free 1040x It is not part of the cost of goods sold. Free 1040x   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Free 1040x Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Free 1040x For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Free 1040x   A special rule may apply to certain donations of food inventory. Free 1040x See Publication 526, Charitable Contributions. Free 1040x Example 1. Free 1040x You are a calendar year taxpayer who uses an accrual method of accounting. Free 1040x In 2013, you contributed property from inventory to a church. Free 1040x It had a fair market value of $600. Free 1040x The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Free 1040x The charitable contribution allowed for 2013 is $400 ($600 − $200). Free 1040x The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Free 1040x The cost of goods sold you use in determining gross income for 2013 must not include the $400. Free 1040x You remove that amount from opening inventory for 2013. Free 1040x Example 2. Free 1040x If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Free 1040x You would not be allowed any charitable contribution deduction for the contributed property. Free 1040x Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Free 1040x If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Free 1040x Trade discounts. Free 1040x   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Free 1040x You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Free 1040x Do not show the discount amount separately as an item in gross income. Free 1040x   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Free 1040x Cash discounts. Free 1040x   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Free 1040x There are two methods of accounting for cash discounts. Free 1040x You can either credit them to a separate discount account or deduct them from total purchases for the year. Free 1040x Whichever method you use, you must be consistent. Free 1040x If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Free 1040x For more information, see Change in Accounting Method in chapter 2. Free 1040x   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Free 1040x If you use this method, do not reduce your cost of goods sold by the cash discounts. Free 1040x Purchase returns and allowances. Free 1040x   You must deduct all returns and allowances from your total purchases during the year. Free 1040x Merchandise withdrawn from sale. Free 1040x   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Free 1040x Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Free 1040x You must also charge the amount to your drawing account. Free 1040x   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Free 1040x As stated above, you also use it to record withdrawals of merchandise for personal or family use. Free 1040x This account is also known as a “withdrawals account” or “personal account. Free 1040x ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Free 1040x Small merchandisers (wholesalers, retailers, etc. Free 1040x ) usually do not have labor costs that can properly be charged to cost of goods sold. Free 1040x In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Free 1040x Direct labor. Free 1040x   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Free 1040x They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Free 1040x Indirect labor. Free 1040x   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Free 1040x Other labor. Free 1040x   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Free 1040x Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Free 1040x Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Free 1040x Those that are not used in the manufacturing process are treated as deferred charges. Free 1040x You deduct them as a business expense when you use them. Free 1040x Business expenses are discussed in chapter 8. Free 1040x Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Free 1040x Containers. Free 1040x   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Free 1040x If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Free 1040x Freight-in. Free 1040x   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Free 1040x Overhead expenses. Free 1040x   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Free 1040x The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Free 1040x Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Free 1040x Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Free 1040x Inventory at the end of the year is also known as closing or ending inventory. Free 1040x Your ending inventory will usually become the beginning inventory of your next tax year. Free 1040x Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. Free 1040x Prev  Up  Next   Home   More Online Publications
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Free 1040x Publication 547 - Main Content Table of Contents CasualtyFamily pet. Free 1040x Progressive deterioration. Free 1040x Special Procedure for Damage From Corrosive Drywall Theft Loss on Deposits Proof of Loss Figuring a LossGain from reimbursement. Free 1040x Business or income-producing property. Free 1040x Loss of inventory. Free 1040x Leased property. Free 1040x Exception for personal-use real property. Free 1040x Decrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Deduction Limits2% Rule $100 Rule 10% Rule Figuring the Deduction Figuring a GainPostponement of Gain When To Report Gains and LossesLoss on deposits. Free 1040x Lessee's loss. Free 1040x Disaster Area LossesDisaster loss to inventory. Free 1040x Main home in disaster area. Free 1040x Unsafe home. Free 1040x Time limit for making choice. Free 1040x Revoking your choice. Free 1040x Figuring the loss deduction. Free 1040x How to report the loss on Form 1040X. Free 1040x Records. Free 1040x Need a copy of your tax return for the preceding year? Postponed Tax Deadlines Contacting the Federal Emergency Management Agency (FEMA) How To Report Gains and LossesProperty held 1 year or less. Free 1040x Property held more than 1 year. Free 1040x Depreciable property. Free 1040x Adjustments to Basis If Deductions Are More Than Income How To Get Tax HelpLow Income Taxpayer Clinics Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Free 1040x A sudden event is one that is swift, not gradual or progressive. Free 1040x An unexpected event is one that is ordinarily unanticipated and unintended. Free 1040x An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. Free 1040x Generally, casualty losses are deductible during the taxable year that the loss occurred. Free 1040x See Table 3, later. Free 1040x Deductible losses. Free 1040x   Deductible casualty losses can result from a number of different causes, including the following. Free 1040x Car accidents (but see Nondeductible losses , next, for exceptions). Free 1040x Earthquakes. Free 1040x Fires (but see Nondeductible losses , next, for exceptions). Free 1040x Floods. Free 1040x Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses , later. Free 1040x Mine cave-ins. Free 1040x Shipwrecks. Free 1040x Sonic booms. Free 1040x Storms, including hurricanes and tornadoes. Free 1040x Terrorist attacks. Free 1040x Vandalism. Free 1040x Volcanic eruptions. Free 1040x Nondeductible losses. Free 1040x   A casualty loss is not deductible if the damage or destruction is caused by the following. Free 1040x Accidentally breaking articles such as glassware or china under normal conditions. Free 1040x A family pet (explained below). Free 1040x A fire if you willfully set it, or pay someone else to set it. Free 1040x A car accident if your willful negligence or willful act caused it. Free 1040x The same is true if the willful act or willful negligence of someone acting for you caused the accident. Free 1040x Progressive deterioration (explained below). Free 1040x However, see Special Procedure for Damage From Corrosive Drywall , later. Free 1040x Family pet. Free 1040x   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. Free 1040x Example. Free 1040x Your antique oriental rug was damaged by your new puppy before it was housebroken. Free 1040x Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. Free 1040x Progressive deterioration. Free 1040x   Loss of property due to progressive deterioration is not deductible as a casualty loss. Free 1040x This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. Free 1040x The following are examples of damage due to progressive deterioration. Free 1040x The steady weakening of a building due to normal wind and weather conditions. Free 1040x The deterioration and damage to a water heater that bursts. Free 1040x However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. Free 1040x Most losses of property caused by droughts. Free 1040x To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. Free 1040x Termite or moth damage. Free 1040x The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. Free 1040x However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. Free 1040x Special Procedure for Damage From Corrosive Drywall Under a special procedure, you can deduct the amounts you paid to repair damage to your home and household appliances due to corrosive drywall. Free 1040x Under this procedure, you treat the amounts paid for repairs as a casualty loss in the year of payment. Free 1040x For example, amounts you paid for repairs in 2013 are deductible on your 2013 tax return and amounts you paid for repairs in 2012 are deductible on your 2012 tax return. Free 1040x Note. Free 1040x If you paid for any repairs before 2013 and you choose to follow this special procedure, you can amend your return for the earlier year by filing Form 1040X, Amended U. Free 1040x S. Free 1040x Individual Income Tax Return, and attaching a completed Form 4684 for the appropriate year. Free 1040x Form 4684 for the appropriate year can be found at IRS. Free 1040x gov. Free 1040x Generally, Form 1040X must be filed within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. Free 1040x Corrosive drywall. Free 1040x   For purposes of this special procedure, “corrosive drywall” means drywall that is identified as problem drywall under the two-step identification method published by the Consumer Product Safety Commission (CPSC) and the Department of Housing and Urban Development (HUD) in their interim guidance dated January 28, 2010, as revised by the CPSC and HUD. Free 1040x The revised identification guidance and remediation guidelines are available at www. Free 1040x cpsc. Free 1040x gov/Safety-Education/Safety-Education-Centers/Drywall. Free 1040x Special instructions for completing Form 4684. Free 1040x   If you choose to follow this special procedure, complete Form 4684, Section A, according to the instructions below. Free 1040x The IRS will not challenge your treatment of damage resulting from corrosive drywall as a casualty loss if you determine and report the loss as explained below. Free 1040x Top margin of Form 4684. Free 1040x   Enter “Revenue Procedure 2010-36”. Free 1040x Line 1. Free 1040x   Enter the information required by the line 1 instructions. Free 1040x Line 2. Free 1040x   Skip this line. Free 1040x Line 3. Free 1040x   Enter the amount of insurance or other reimbursements you received (including through litigation). Free 1040x If none, enter -0-. Free 1040x Lines 4–7. Free 1040x   Skip these lines. Free 1040x Line 8. Free 1040x   Enter the amount you paid to repair the damage to your home and household appliances due to corrosive drywall. Free 1040x Enter only the amounts you paid to restore your home to the condition existing immediately before the damage. Free 1040x Do not enter any amounts you paid for improvements or additions that increased the value of your home above its pre-loss value. Free 1040x If you replaced a household appliance instead of repairing it, enter the lesser of: The current cost to replace the original appliance, or The basis of the original appliance (generally its cost). Free 1040x Line 9. Free 1040x   If line 8 is more than line 3, do one of the following. Free 1040x If you have a pending claim for reimbursement (or you intend to pursue reimbursement), enter 75% of the difference between lines 3 and 8. Free 1040x If item (1) does not apply to you, enter the full amount of the difference between lines 3 and 8. Free 1040x If line 8 is less than or equal to line 3, you cannot claim a casualty loss deduction using this special procedure. Free 1040x    If you have a pending claim for reimbursement (or you intend to pursue reimbursement), you may have income or an additional deduction in a later tax year depending on the actual amount of reimbursement received. Free 1040x See Reimbursement Received After Deducting Loss, later. Free 1040x Lines 10–18. Free 1040x   Complete these lines according to the Instructions for Form 4684. Free 1040x Choosing not to follow this special procedure. Free 1040x   If you choose not to follow this special procedure, you are subject to all of the provisions that apply to the deductibility of casualty losses, and you must complete lines 1–9 according to the Instructions for Form 4684. Free 1040x This means, for example, that you must establish that the damage, destruction, or loss of property resulted from an identifiable event as defined earlier under Casualty . Free 1040x Furthermore, you must have proof that shows the following. Free 1040x The loss is properly deductible in the tax year you claimed it and not in some other year. Free 1040x See When To Report Gains and Losses , later. Free 1040x The amount of the claimed loss. Free 1040x See Proof of Loss , later. Free 1040x No claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery. Free 1040x See When To Report Gains and Losses , later. Free 1040x Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. Free 1040x The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. Free 1040x You do not need to show a conviction for theft. Free 1040x Theft includes the taking of money or property by the following means. Free 1040x Blackmail. Free 1040x Burglary. Free 1040x Embezzlement. Free 1040x Extortion. Free 1040x Kidnapping for ransom. Free 1040x Larceny. Free 1040x Robbery. Free 1040x The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Free 1040x Decline in market value of stock. Free 1040x   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. Free 1040x However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. Free 1040x You report a capital loss on Schedule D (Form 1040). Free 1040x For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. Free 1040x Mislaid or lost property. Free 1040x    The simple disappearance of money or property is not a theft. Free 1040x However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Free 1040x Sudden, unexpected, and unusual events were defined earlier under Casualty . Free 1040x Example. Free 1040x A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. Free 1040x The diamond falls from the ring and is never found. Free 1040x The loss of the diamond is a casualty. Free 1040x Losses from Ponzi-type investment schemes. Free 1040x   The IRS has issued the following guidance to assist taxpayers who are victims of losses from Ponzi-type investment schemes: Revenue Ruling 2009-9, 2009-14 I. Free 1040x R. Free 1040x B. Free 1040x 735 (available at www. Free 1040x irs. Free 1040x gov/irb/2009-14_IRB/ar07. Free 1040x html). Free 1040x Revenue Procedure 2009-20, 2009-14 I. Free 1040x R. Free 1040x B. Free 1040x 749 (available at www. Free 1040x irs. Free 1040x gov/irb/2009-14_IRB/ar11. Free 1040x html). Free 1040x Revenue Procedure 2011-58, 2011-50 I. Free 1040x R. Free 1040x B. Free 1040x 847 (available at www. Free 1040x irs. Free 1040x gov/irb/2011-50_IRB/ar11. Free 1040x html). Free 1040x If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. Free 1040x Skip lines 19 to 27, but you must fill out Section B, lines 29 to 39, as appropriate. Free 1040x Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. Free 1040x You do not need to complete Appendix A. Free 1040x For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. Free 1040x   If you choose not to use the procedures in Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. Free 1040x Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. Free 1040x If you incurred this type of loss, you can choose one of the following ways to deduct the loss. Free 1040x As a casualty loss. Free 1040x As an ordinary loss. Free 1040x As a nonbusiness bad debt. Free 1040x Casualty loss or ordinary loss. Free 1040x   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. Free 1040x The choice generally is made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. Free 1040x If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. Free 1040x However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. Free 1040x Once you make the choice, you cannot change it without permission from the Internal Revenue Service. Free 1040x   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. Free 1040x The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. Free 1040x Your loss is subject to the 2%-of-adjusted-gross-income limit. Free 1040x You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. Free 1040x Nonbusiness bad debt. Free 1040x   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. Free 1040x How to report. Free 1040x   The kind of deduction you choose for your loss on deposits determines how you report your loss. Free 1040x See Table 1. Free 1040x More information. Free 1040x   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684. Free 1040x Deducted loss recovered. Free 1040x   If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of recovery. Free 1040x If any part of the original deduction did not reduce your tax in the earlier year, you do not have to include that part of the recovery in your income. Free 1040x For more information, see Recoveries in Publication 525. Free 1040x Proof of Loss To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. Free 1040x You also must be able to support the amount you take as a deduction. Free 1040x Casualty loss proof. Free 1040x   For a casualty loss, you should be able to show all of the following. Free 1040x The type of casualty (car accident, fire, storm, etc. Free 1040x ) and when it occurred. Free 1040x That the loss was a direct result of the casualty. Free 1040x That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage. Free 1040x Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Free 1040x Theft loss proof. Free 1040x   For a theft loss, you should be able to show all of the following. Free 1040x When you discovered that your property was missing. Free 1040x That your property was stolen. Free 1040x That you were the owner of the property. Free 1040x Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Free 1040x    It is important that you have records that will prove your deduction. Free 1040x If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. Free 1040x Figuring a Loss To determine your deduction for a casualty or theft loss, you must first figure your loss. Free 1040x Table 1. Free 1040x Reporting Loss on Deposits IF you choose to report the loss as a(n). Free 1040x . Free 1040x . Free 1040x   THEN report it on. Free 1040x . Free 1040x . Free 1040x casualty loss   Form 4684 and Schedule A  (Form 1040). Free 1040x ordinary loss   Schedule A (Form 1040). Free 1040x nonbusiness bad debt   Form 8949 and Schedule D (Form 1040). Free 1040x Amount of loss. Free 1040x   Figure the amount of your loss using the following steps. Free 1040x Determine your adjusted basis in the property before the casualty or theft. Free 1040x Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. Free 1040x From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. Free 1040x For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. Free 1040x Gain from reimbursement. Free 1040x   If your reimbursement is more than your adjusted basis in the property, you have a gain. Free 1040x This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. Free 1040x If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. Free 1040x See Figuring a Gain , later. Free 1040x Business or income-producing property. Free 1040x   If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not considered. Free 1040x Your loss is figured as follows:   Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive   Loss of inventory. Free 1040x   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers. Free 1040x   One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. Free 1040x Do not claim this loss again as a casualty or theft loss. Free 1040x If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income. Free 1040x   The other way is to deduct the loss separately. Free 1040x If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. Free 1040x Reduce the loss by the reimbursement you received. Free 1040x Do not include the reimbursement in gross income. Free 1040x If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery. Free 1040x Leased property. Free 1040x   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. Free 1040x Separate computations. Free 1040x   Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. Free 1040x Then combine the losses to determine the total loss from that casualty or theft. Free 1040x Exception for personal-use real property. Free 1040x   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. Free 1040x Figure the loss using the smaller of the following. Free 1040x The decrease in FMV of the entire property. Free 1040x The adjusted basis of the entire property. Free 1040x   See Real property under Figuring the Deduction, later. Free 1040x Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. Free 1040x The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. Free 1040x FMV of stolen property. Free 1040x   The FMV of property immediately after a theft is considered to be zero because you no longer have the property. Free 1040x Example. Free 1040x Several years ago, you purchased silver dollars at face value for $150. Free 1040x This is your adjusted basis in the property. Free 1040x Your silver dollars were stolen this year. Free 1040x The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. Free 1040x Your theft loss is $150. Free 1040x Recovered stolen property. Free 1040x   Recovered stolen property is your property that was stolen and later returned to you. Free 1040x If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. Free 1040x Use this amount to refigure your total loss for the year in which the loss was deducted. Free 1040x   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. Free 1040x But report the difference only up to the amount of the loss that reduced your tax. Free 1040x For more information on the amount to report, see Recoveries in Publication 525. Free 1040x Figuring Decrease in FMV — Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. Free 1040x However, other measures also can be used to establish certain decreases. Free 1040x See Appraisal and Cost of cleaning up or making repairs , next. Free 1040x Appraisal. Free 1040x   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards should be made by a competent appraiser. Free 1040x The appraiser must recognize the effects of any general market decline that may occur along with the casualty. Free 1040x This information is needed to limit any deduction to the actual loss resulting from damage to the property. Free 1040x   Several factors are important in evaluating the accuracy of an appraisal, including the following. Free 1040x The appraiser's familiarity with your property before and after the casualty or theft. Free 1040x The appraiser's knowledge of sales of comparable property in the area. Free 1040x The appraiser's knowledge of conditions in the area of the casualty. Free 1040x The appraiser's method of appraisal. Free 1040x You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. Free 1040x For more information on disasters, see Disaster Area Losses, later. Free 1040x Cost of cleaning up or making repairs. Free 1040x   The cost of repairing damaged property is not part of a casualty loss. Free 1040x Neither is the cost of cleaning up after a casualty. Free 1040x But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. Free 1040x The repairs are actually made. Free 1040x The repairs are necessary to bring the property back to its condition before the casualty. Free 1040x The amount spent for repairs is not excessive. Free 1040x The repairs take care of the damage only. Free 1040x The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. Free 1040x Landscaping. Free 1040x   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. Free 1040x You may be able to measure your loss by what you spend on the following. Free 1040x Removing destroyed or damaged trees and shrubs, minus any salvage you receive. Free 1040x Pruning and other measures taken to preserve damaged trees and shrubs. Free 1040x Replanting necessary to restore the property to its approximate value before the casualty. Free 1040x Car value. Free 1040x   Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. Free 1040x You can use the books' retail values and modify them by factors such as the mileage and condition of your car to figure its value. Free 1040x The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. Free 1040x If your car is not listed in the books, determine its value from other sources. Free 1040x A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. Free 1040x Figuring Decrease in FMV — Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. Free 1040x Cost of protection. Free 1040x   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. Free 1040x The amount you spend on insurance or to board up your house against a storm is not part of your loss. Free 1040x If the property is business property, these expenses are deductible as business expenses. Free 1040x   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. Free 1040x An example would be the cost of a dike to prevent flooding. Free 1040x Exception. Free 1040x   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments (discussed later under Disaster Area Losses ). Free 1040x Related expenses. Free 1040x   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. Free 1040x However, they may be deductible as business expenses if the damaged or stolen property is business property. Free 1040x Replacement cost. Free 1040x   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. Free 1040x Example. Free 1040x You bought a new chair 4 years ago for $300. Free 1040x In April, a fire destroyed the chair. Free 1040x You estimate that it would cost $500 to replace it. Free 1040x If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. Free 1040x The chair was not insured. Free 1040x Your loss is $100, the FMV of the chair before the fire. Free 1040x It is not $500, the replacement cost. Free 1040x Sentimental value. Free 1040x   Do not consider sentimental value when determining your loss. Free 1040x If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. Free 1040x Decline in market value of property in or near casualty area. Free 1040x   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. Free 1040x You have a loss only for actual casualty damage to your property. Free 1040x However, if your home is in a federally declared disaster area, see Disaster Area Losses , later. Free 1040x Costs of photographs and appraisals. Free 1040x   Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. Free 1040x Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. Free 1040x   Appraisals are used to figure the decrease in FMV because of a casualty or theft. Free 1040x See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. Free 1040x   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. Free 1040x They are expenses in determining your tax liability. Free 1040x You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). Free 1040x Adjusted Basis The measure of your investment in the property you own is its basis. Free 1040x For property you buy, your basis is usually its cost to you. Free 1040x For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551. Free 1040x If you inherited the property from someone who died in 2010 and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Free 1040x Adjustments to basis. Free 1040x    While you own the property, various events may take place that change your basis. Free 1040x Some events, such as additions or permanent improvements to the property, increase basis. Free 1040x Others, such as earlier casualty losses and depreciation deductions, decrease basis. Free 1040x When you add the increases to the basis and subtract the decreases from the basis, the result is your adjusted basis. Free 1040x See Publication 551 for more information on figuring the basis of your property. Free 1040x Insurance and Other Reimbursements If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. Free 1040x You do not have a casualty or theft loss to the extent you are reimbursed. Free 1040x If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. Free 1040x You must reduce your loss even if you do not receive payment until a later tax year. Free 1040x See Reimbursement Received After Deducting Loss , later. Free 1040x Failure to file a claim for reimbursement. Free 1040x   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Free 1040x Otherwise, you cannot deduct this loss as a casualty or theft. Free 1040x The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. Free 1040x Example. Free 1040x You have a car insurance policy with a $1,000 deductible. Free 1040x Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the $100 and 10% rules, discussed later). Free 1040x This is true, even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. Free 1040x Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. Free 1040x Other types of reimbursements are discussed next. Free 1040x Also see the Instructions for Form 4684. Free 1040x Employer's emergency disaster fund. Free 1040x   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. Free 1040x Take into consideration only the amount you used to replace your destroyed or damaged property. Free 1040x Example. Free 1040x Your home was extensively damaged by a tornado. Free 1040x Your loss after reimbursement from your insurance company was $10,000. Free 1040x Your employer set up a disaster relief fund for its employees. Free 1040x Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. Free 1040x You received $4,000 from the fund and spent the entire amount on repairs to your home. Free 1040x In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. Free 1040x Your casualty loss before applying the deduction limits (discussed later) is $6,000. Free 1040x Cash gifts. Free 1040x   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. Free 1040x This applies even if you use the money to pay for repairs to property damaged in the disaster. Free 1040x Example. Free 1040x Your home was damaged by a hurricane. Free 1040x Relatives and neighbors made cash gifts to you that were excludable from your income. Free 1040x You used part of the cash gifts to pay for repairs to your home. Free 1040x There were no limits or restrictions on how you could use the cash gifts. Free 1040x It was an excludable gift, so the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. Free 1040x Insurance payments for living expenses. Free 1040x   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. Free 1040x You lose the use of your main home because of a casualty. Free 1040x Government authorities do not allow you access to your main home because of a casualty or threat of one. Free 1040x Inclusion in income. Free 1040x   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. Free 1040x Report this amount on Form 1040, line 21. Free 1040x However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. Free 1040x See Qualified disaster relief payments , later, under Disaster Area Losses. Free 1040x   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. Free 1040x Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. Free 1040x Generally, these expenses include the amounts you pay for the following. Free 1040x Renting suitable housing. Free 1040x Transportation. Free 1040x Food. Free 1040x Utilities. Free 1040x Miscellaneous services. Free 1040x Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. Free 1040x Example. Free 1040x As a result of a fire, you vacated your apartment for a month and moved to a motel. Free 1040x You normally pay $525 a month for rent. Free 1040x None was charged for the month the apartment was vacated. Free 1040x Your motel rent for this month was $1,200. Free 1040x You normally pay $200 a month for food. Free 1040x Your food expenses for the month you lived in the motel were $400. Free 1040x You received $1,100 from your insurance company to cover your living expenses. Free 1040x You determine the payment you must include in income as follows. Free 1040x 1. Free 1040x Insurance payment for living expenses $1,100 2. Free 1040x Actual expenses during the month you are unable to use your home because of the fire $1,600   3. Free 1040x Normal living expenses 725   4. Free 1040x Temporary increase in living expenses: Subtract line 3  from line 2 875 5. Free 1040x Amount of payment includible in income: Subtract line 4 from line 1 $ 225 Tax year of inclusion. Free 1040x   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. Free 1040x Example. Free 1040x Your main home was destroyed by a tornado in August 2011. Free 1040x You regained use of your home in November 2012. Free 1040x The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. Free 1040x You include this amount in income on your 2012 Form 1040. Free 1040x If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. Free 1040x Disaster relief. Free 1040x   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. Free 1040x Table 2. Free 1040x Deduction Limit Rules for Personal-Use and Employee Property       $100 Rule 10% Rule 2% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. Free 1040x Apply this rule to personal-use property after you have figured the amount of your loss. Free 1040x You must reduce your total casualty or theft loss by 10% of your adjusted gross income. Free 1040x Apply this rule to personal-use property after you reduce each loss by $100 (the $100 rule). Free 1040x You must reduce your total casualty or theft loss by 2% of your adjusted gross income. Free 1040x Apply this rule to property you used in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous itemized deductions. Free 1040x Single Event Apply this rule only once, even if many pieces of property are affected. Free 1040x Apply this rule only once, even if many pieces of property are affected. Free 1040x Apply this rule only once, even if many pieces of property are affected. Free 1040x More Than One Event Apply to the loss from each event. Free 1040x Apply to the total of all your losses from all events. Free 1040x Apply to the total of all your losses from all events. Free 1040x More Than One Person— With Loss From the   Same Event  (other than a married couple  filing jointly) Apply separately to each person. Free 1040x Apply separately to each person. Free 1040x Apply separately to each person. Free 1040x Married Couple—  With Loss From the  Same Event Filing Joint Return Apply as if you were one person. Free 1040x Apply as if you were one person. Free 1040x Apply as if you were one person. Free 1040x Filing Separate Return Apply separately to each spouse. Free 1040x Apply separately to each spouse. Free 1040x Apply separately to each spouse. Free 1040x More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. Free 1040x Apply separately to each owner of jointly owned property. Free 1040x Apply separately to each owner of jointly owned property. Free 1040x    Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster, are not taxable income to you. Free 1040x For more information, see Qualified disaster relief payments under Disaster Area Losses, later. Free 1040x   Disaster unemployment assistance payments are unemployment benefits that are taxable. Free 1040x   Generally, disaster relief grants received under the Robert T. Free 1040x Stafford Disaster Relief and Emergency Assistance Act are not included in your income. Free 1040x See Federal disaster relief grants , later, under Disaster Area Losses. Free 1040x Loan proceeds. Free 1040x   Do not reduce your casualty loss by loan proceeds you use to rehabilitate or replace property on which you are claiming a casualty loss deduction. Free 1040x If you have a federal loan that is canceled (forgiven), see Federal loan canceled , later, under Disaster Area Losses. Free 1040x Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. Free 1040x This section explains the adjustment you may have to make. Free 1040x Actual reimbursement less than expected. Free 1040x   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. Free 1040x Example. Free 1040x Your personal car had a FMV of $2,000 when it was destroyed in a collision with another car in 2012. Free 1040x The accident was due to the negligence of the other driver. Free 1040x At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. Free 1040x You did not have a deductible loss in 2012. Free 1040x In January 2013, the court awards you a judgment of $2,000. Free 1040x However, in July it becomes apparent that you will be unable to collect any amount from the other driver. Free 1040x Since this is your only casualty or theft loss, you can deduct the loss in 2013 that is figured by applying the Deduction Limits (discussed later). Free 1040x Actual reimbursement more than expected. Free 1040x   If you later receive more reimbursement than you expected, after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. Free 1040x However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. Free 1040x You do not refigure your tax for the year you claimed the deduction. Free 1040x See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. Free 1040x Example. Free 1040x In 2012, a hurricane destroyed your motorboat. Free 1040x Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. Free 1040x You did not itemize deductions on your 2012 return, so you could not deduct the loss. Free 1040x When the insurance company reimburses you for the loss, you do not report any of the reimbursement as income. Free 1040x This is true even if it is for the full $3,000 because you did not deduct the loss on your 2012 return. Free 1040x The loss did not reduce your tax. Free 1040x    If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. Free 1040x If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. Free 1040x Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. Free 1040x You may be able to postpone reporting any remaining gain as explained under Postponement of Gain, later. Free 1040x Actual reimbursement same as expected. Free 1040x   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. Free 1040x Example. Free 1040x In December 2013, you had a collision while driving your personal car. Free 1040x Repairs to the car cost $950. Free 1040x You had $100 deductible collision insurance. Free 1040x Your insurance company agreed to reimburse you for the rest of the damage. Free 1040x Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. Free 1040x Due to the $100 rule, you cannot deduct the $100 you paid as the deductible. Free 1040x When you receive the $850 from the insurance company in 2014, do not report it as income. Free 1040x Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. Free 1040x The deduction for casualty and theft losses of employee property and personal-use property is limited. Free 1040x A loss on employee property is subject to the 2% rule, discussed next. Free 1040x With certain exceptions, a loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. Free 1040x The 2%, $100, and 10% rules are also summarized in Table 2 . Free 1040x Losses on business property (other than employee property) and income-producing property are not subject to these rules. Free 1040x However, if your casualty or theft loss involved a home you used for business or rented out, your deductible loss may be limited. Free 1040x See the Instructions for Form 4684, Section B. Free 1040x If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions. Free 1040x 2% Rule The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040) or Form 1040NR, Schedule A, must be reduced by 2% of your adjusted gross income. Free 1040x Employee property is property used in performing services as an employee. Free 1040x $100 Rule After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. Free 1040x This reduction applies to each total casualty or theft loss. Free 1040x It does not matter how many pieces of property are involved in an event. Free 1040x Only a single $100 reduction applies. Free 1040x Example. Free 1040x You have $750 deductible collision insurance on your car. Free 1040x The car is damaged in a collision. Free 1040x The insurance company pays you for the damage minus the $750 deductible. Free 1040x The amount of the casualty loss is based solely on the deductible. Free 1040x The casualty loss is $650 ($750 − $100) because the first $100 of a casualty loss on personal-use property is not deductible. Free 1040x Single event. Free 1040x   Generally, events closely related in origin cause a single casualty. Free 1040x It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. Free 1040x A single casualty may also damage two or more pieces of property, such as a hailstorm that damages both your home and your car parked in your driveway. Free 1040x Example 1. Free 1040x A thunderstorm destroyed your pleasure boat. Free 1040x You also lost some boating equipment in the storm. Free 1040x Your loss was $5,000 on the boat and $1,200 on the equipment. Free 1040x Your insurance company reimbursed you $4,500 for the damage to your boat. Free 1040x You had no insurance coverage on the equipment. Free 1040x Your casualty loss is from a single event and the $100 rule applies once. Free 1040x Figure your loss before applying the 10% rule (discussed later) as follows. Free 1040x     Boat Equipment 1. Free 1040x Loss $5,000 $1,200 2. Free 1040x Subtract insurance 4,500 -0- 3. Free 1040x Loss after reimbursement $ 500 $1,200 4. Free 1040x Total loss $1,700 5. Free 1040x Subtract $100 100 6. Free 1040x Loss before 10% rule $1,600 Example 2. Free 1040x Thieves broke into your home in January and stole a ring and a fur coat. Free 1040x You had a loss of $200 on the ring and $700 on the coat. Free 1040x This is a single theft. Free 1040x The $100 rule applies to the total $900 loss. Free 1040x Example 3. Free 1040x In September, hurricane winds blew the roof off your home. Free 1040x Flood waters caused by the hurricane further damaged your home and destroyed your furniture and personal car. Free 1040x This is considered a single casualty. Free 1040x The $100 rule is applied to your total loss from the flood waters and the wind. Free 1040x More than one loss. Free 1040x   If you have more than one casualty or theft loss during your tax year, you must reduce each loss by $100. Free 1040x Example. Free 1040x Your family car was damaged in an accident in January. Free 1040x Your loss after the insurance reimbursement was $75. Free 1040x In February, your car was damaged in another accident. Free 1040x This time your loss after the insurance reimbursement was $90. Free 1040x Apply the $100 rule to each separate casualty loss. Free 1040x Since neither accident resulted in a loss of over $100, you are not entitled to any deduction for these accidents. Free 1040x More than one person. Free 1040x   If two or more individuals (other than a husband and wife filing a joint return) have losses from the same casualty or theft, the $100 rule applies separately to each individual. Free 1040x Example. Free 1040x A fire damaged your house and also damaged the personal property of your house guest. Free 1040x You must reduce your loss by $100. Free 1040x Your house guest must reduce his or her loss by $100. Free 1040x Married taxpayers. Free 1040x   If you and your spouse file a joint return, you are treated as one individual in applying the $100 rule. Free 1040x It does not matter whether you own the property jointly or separately. Free 1040x   If you and your spouse have a casualty or theft loss and you file separate returns, each of you must reduce your loss by $100. Free 1040x This is true even if you own the property jointly. Free 1040x If one spouse owns the property, only that spouse can figure a loss deduction on a separate return. Free 1040x   If the casualty or theft loss is on property you own as tenants by the entirety, each of you can figure your deduction on only one-half of the loss on separate returns. Free 1040x Neither of you can figure your deduction on the entire loss on a separate return. Free 1040x Each of you must reduce the loss by $100. Free 1040x More than one owner. Free 1040x   If two or more individuals (other than a husband and wife filing a joint return) have a loss on property jointly owned, the $100 rule applies separately to each. Free 1040x For example, if two sisters live together in a home they own jointly and they have a casualty loss on the home, the $100 rule applies separately to each sister. Free 1040x 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Free 1040x Apply this rule after you reduce each loss by $100. Free 1040x For more information, see the Form 4684 instructions. Free 1040x If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. Free 1040x Example. Free 1040x In June, you discovered that your house had been burglarized. Free 1040x Your loss after insurance reimbursement was $2,000. Free 1040x Your adjusted gross income for the year you discovered the theft is $29,500. Free 1040x Figure your theft loss as follows. Free 1040x 1. Free 1040x Loss after insurance $2,000 2. Free 1040x Subtract $100 100 3. Free 1040x Loss after $100 rule $1,900 4. Free 1040x Subtract 10% of $29,500 AGI $2,950 5. Free 1040x Theft loss deduction $-0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950). Free 1040x More than one loss. Free 1040x   If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. Free 1040x Then you must reduce the total of all your losses by 10% of your adjusted gross income. Free 1040x Example. Free 1040x In March, you had a car accident that totally destroyed your car. Free 1040x You did not have collision insurance on your car, so you did not receive any insurance reimbursement. Free 1040x Your loss on the car was $1,800. Free 1040x In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items you had stored there. Free 1040x Your loss on the basement items after reimbursement was $2,100. Free 1040x Your adjusted gross income for the year that the accident and fire occurred is $25,000. Free 1040x You figure your casualty loss deduction as follows. Free 1040x     Car Basement 1. Free 1040x Loss $1,800 $2,100 2. Free 1040x Subtract $100 per incident 100 100 3. Free 1040x Loss after $100 rule $1,700 $2,000 4. Free 1040x Total loss $3,700 5. Free 1040x Subtract 10% of $25,000 AGI 2,500 6. Free 1040x Casualty loss deduction $1,200 Married taxpayers. Free 1040x   If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. Free 1040x It does not matter if you own the property jointly or separately. Free 1040x   If you file separate returns, the 10% rule applies to each return on which a loss is claimed. Free 1040x More than one owner. Free 1040x   If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies separately to each. Free 1040x Gains and losses. Free 1040x   If you have casualty or theft gains as well as losses to personal-use property, you must compare your total gains to your total losses. Free 1040x Do this after you have reduced each loss by any reimbursements and by $100 but before you have reduced the losses by 10% of your adjusted gross income. Free 1040x Casualty or theft gains do not include gains you choose to postpone. Free 1040x See Postponement of Gain, later. Free 1040x Losses more than gains. Free 1040x   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. Free 1040x The rest, if any, is your deductible loss from personal-use property. Free 1040x Example. Free 1040x Your theft loss after reducing it by reimbursements and by $100 is $2,700. Free 1040x Your casualty gain is $700. Free 1040x Your loss is more than your gain, so you must reduce your $2,000 net loss ($2,700 − $700) by 10% of your adjusted gross income. Free 1040x Gains more than losses. Free 1040x   If your recognized gains are more than your losses, subtract your losses from your gains. Free 1040x The difference is treated as a capital gain and must be reported on Schedule D (Form 1040). Free 1040x The 10% rule does not apply to your gains. Free 1040x Example. Free 1040x Your theft loss is $600 after reducing it by reimbursements and by $100. Free 1040x Your casualty gain is $1,600. Free 1040x Because your gain is more than your loss, you must report the $1,000 net gain ($1,600 − $600) on Schedule D (Form 1040). Free 1040x More information. Free 1040x   For information on how to figure recognized gains, see Figuring a Gain , later. Free 1040x Figuring the Deduction Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. Free 1040x However, a special rule applies to real property you own for personal use. Free 1040x Real property. Free 1040x   In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. Free 1040x Example 1. Free 1040x In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. Free 1040x (Your land was not damaged. Free 1040x ) This was your only casualty or theft loss for the year. Free 1040x The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). Free 1040x The FMV immediately after the fire was $35,000 (value of the land). Free 1040x You collected $130,000 from the insurance company. Free 1040x Your adjusted gross income for the year the fire occurred is $80,000. Free 1040x Your deduction for the casualty loss is $6,700, figured in the following manner. Free 1040x 1. Free 1040x Adjusted basis of the entire property (cost in this example) $144,800 2. Free 1040x FMV of entire property  before fire $180,000 3. Free 1040x FMV of entire property after fire 35,000 4. Free 1040x Decrease in FMV of entire property (line 2 − line 3) $145,000 5. Free 1040x Loss (smaller of line 1 or line 4) $144,800 6. Free 1040x Subtract insurance 130,000 7. Free 1040x Loss after reimbursement $14,800 8. Free 1040x Subtract $100 100 9. Free 1040x Loss after $100 rule $14,700 10. Free 1040x Subtract 10% of $80,000 AGI 8,000 11. Free 1040x Casualty loss deduction $ 6,700 Example 2. Free 1040x You bought your home a few years ago. Free 1040x You paid $150,000 ($10,000 for the land and $140,000 for the house). Free 1040x You also spent an additional $2,000 for landscaping. Free 1040x This year a fire destroyed your home. Free 1040x The fire also damaged the shrubbery and trees in your yard. Free 1040x The fire was your only casualty or theft loss this year. Free 1040x Competent appraisers valued the property as a whole at $175,000 before the fire, but only $50,000 after the fire. Free 1040x Shortly after the fire, the insurance company paid you $95,000 for the loss. Free 1040x Your adjusted gross income for this year is $70,000. Free 1040x You figure your casualty loss deduction as follows. Free 1040x 1. Free 1040x Adjusted basis of the entire property (cost of land, building, and landscaping) $152,000 2. Free 1040x FMV of entire property  before fire $175,000 3. Free 1040x FMV of entire property after fire 50,000 4. Free 1040x Decrease in FMV of entire property (line 2 − line 3) $125,000 5. Free 1040x Loss (smaller of line 1 or line 4) $125,000 6. Free 1040x Subtract insurance 95,000 7. Free 1040x Loss after reimbursement $30,000 8. Free 1040x Subtract $100 100 9. Free 1040x Loss after $100 rule $29,900 10. Free 1040x Subtract 10% of $70,000 AGI 7,000 11. Free 1040x Casualty loss deduction $ 22,900 Personal property. Free 1040x   Personal property is any property that is not real property. Free 1040x If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. Free 1040x Then combine these separate losses to figure the total loss. Free 1040x Reduce the total loss by $100 and 10% of your adjusted gross income to figure the loss deduction. Free 1040x Example 1. Free 1040x In August, a storm destroyed your pleasure boat, which cost $18,500. Free 1040x This was your only casualty or theft loss for the year. Free 1040x Its FMV immediately before the storm was $17,000. Free 1040x You had no insurance, but were able to salvage the motor of the boat and sell it for $200. Free 1040x Your adjusted gross income for the year the casualty occurred is $70,000. Free 1040x Although the motor was sold separately, it is part of the boat and not a separate item of property. Free 1040x You figure your casualty loss deduction as follows. Free 1040x 1. Free 1040x Adjusted basis (cost in this example) $18,500 2. Free 1040x FMV before storm $17,000 3. Free 1040x FMV after storm 200 4. Free 1040x Decrease in FMV  (line 2 − line 3) $16,800 5. Free 1040x Loss (smaller of line 1 or line 4) $16,800 6. Free 1040x Subtract insurance -0- 7. Free 1040x Loss after reimbursement $16,800 8. Free 1040x Subtract $100 100 9. Free 1040x Loss after $100 rule $16,700 10. Free 1040x Subtract 10% of $70,000 AGI 7,000 11. Free 1040x Casualty loss deduction $ 9,700 Example 2. Free 1040x In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. Free 1040x You had bought the car for $30,000. Free 1040x The FMV of the car just before the accident was $17,500. Free 1040x Its FMV just after the accident was $180 (scrap value). Free 1040x Your insurance company reimbursed you $16,000. Free 1040x Your watch was not insured. Free 1040x You had purchased it for $250. Free 1040x Its FMV just before the accident was $500. Free 1040x Your adjusted gross income for the year the accident occurred is $97,000. Free 1040x Your casualty loss deduction is zero, figured as follows. Free 1040x     Car Watch 1. Free 1040x Adjusted basis (cost) $30,000 $250 2. Free 1040x FMV before accident $17,500 $500 3. Free 1040x FMV after accident 180 -0- 4. Free 1040x Decrease in FMV (line 2 − line 3) $17,320 $500 5. Free 1040x Loss (smaller of line 1 or line 4) $17,320 $250 6. Free 1040x Subtract insurance 16,000 -0- 7. Free 1040x Loss after reimbursement $1,320 $250 8. Free 1040x Total loss $1,570 9. Free 1040x Subtract $100 100 10. Free 1040x Loss after $100 rule $1,470 11. Free 1040x Subtract 10% of $97,000 AGI 9,700 12. Free 1040x Casualty loss deduction $ -0- Both real and personal properties. Free 1040x   When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. Free 1040x However, you apply a single $100 reduction to the total loss. Free 1040x Then, you apply the 10% rule to figure the casualty loss deduction. Free 1040x Example. Free 1040x In July, a hurricane damaged your home, which cost you $164,000 including land. Free 1040x The FMV of the property (both building and land) immediately before the storm was $170,000 and its FMV immediately after the storm was $100,000. Free 1040x Your household furnishings were also damaged. Free 1040x You separately figured the loss on each damaged household item and arrived at a total loss of $600. Free 1040x You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. Free 1040x Your adjusted gross income for the year the hurricane occurred is $65,000. Free 1040x You figure your casualty loss deduction from the hurricane in the following manner. Free 1040x 1. Free 1040x Adjusted basis of real property (cost in this example) $164,000 2. Free 1040x FMV of real property before hurricane $170,000 3. Free 1040x FMV of real property after hurricane 100,000 4. Free 1040x Decrease in FMV of real property (line 2 − line 3) $70,000 5. Free 1040x Loss on real property (smaller of line 1 or line 4) $70,000 6. Free 1040x Subtract insurance 50,000 7. Free 1040x Loss on real property after reimbursement $20,000 8. Free 1040x Loss on furnishings $600 9. Free 1040x Subtract insurance -0- 10. Free 1040x Loss on furnishings after reimbursement $600 11. Free 1040x Total loss (line 7 plus line 10) $20,600 12. Free 1040x Subtract $100 100 13. Free 1040x Loss after $100 rule $20,500 14. Free 1040x Subtract 10% of $65,000 AGI 6,500 15. Free 1040x Casualty loss deduction $14,000 Property used partly for business and partly for personal purposes. Free 1040x   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use portion and for the business or income-producing portion. Free 1040x You must figure each loss separately because the losses attributed to these two uses are figured in two different ways. Free 1040x When figuring each loss, allocate the total cost or basis, the FMV before and after the casualty or theft loss, and the insurance or other reimbursement between the business and personal use of the property. Free 1040x The $100 rule and the 10% rule apply only to the casualty or theft loss on the personal-use portion of the property. Free 1040x Example. Free 1040x You own a building that you constructed on leased land. Free 1040x You use half of the building for your business and you live in the other half. Free 1040x The cost of the building was $400,000. Free 1040x You made no further improvements or additions to it. Free 1040x A flood in March damaged the entire building. Free 1040x The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. Free 1040x Your insurance company reimbursed you $40,000 for the flood damage. Free 1040x Depreciation on the business part of the building before the flood totaled $24,000. Free 1040x Your adjusted gross income for the year the flood occurred is $125,000. Free 1040x You have a deductible business casualty loss of $10,000. Free 1040x You do not have a deductible personal casualty loss because of the 10% rule. Free 1040x You figure your loss as follows. Free 1040x     Business   Personal     Part   Part 1. Free 1040x Cost (total $400,000) $200,000   $200,000 2. Free 1040x Subtract depreciation 24,000   -0- 3. Free 1040x Adjusted basis $176,000   $200,000 4. Free 1040x FMV before flood (total $380,000) $190,000   $190,000 5. Free 1040x FMV after flood (total $320,000) 160,000   160,000 6. Free 1040x Decrease in FMV  (line 4 − line 5) $30,000   $30,000 7. Free 1040x Loss (smaller of line 3 or line 6) $30,000   $30,000 8. Free 1040x Subtract insurance 20,000   20,000 9. Free 1040x Loss after reimbursement $10,000   $10,000 10. Free 1040x Subtract $100 on personal-use property -0-   100 11. Free 1040x Loss after $100 rule $10,000   $9,900 12. Free 1040x Subtract 10% of $125,000 AGI on personal-use property -0-   12,500 13. Free 1040x Deductible business loss $10,000     14. Free 1040x Deductible personal loss $-0- Figuring a Gain If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Free 1040x Your gain is figured as follows. Free 1040x The amount you receive (discussed next), minus Your adjusted basis in the property at the time of the casualty or theft. Free 1040x See Adjusted Basis , earlier, for information on adjusted basis. Free 1040x Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. Free 1040x Amount you receive. Free 1040x   The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. Free 1040x It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. Free 1040x Example. Free 1040x A hurricane destroyed your personal residence and the insurance company awarded you $145,000. Free 1040x You received $140,000 in cash. Free 1040x The remaining $5,000 was paid directly to the holder of a mortgage on the property. Free 1040x The amount you received includes the $5,000 reimbursement paid on the mortgage. Free 1040x Main home destroyed. Free 1040x   If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your home. Free 1040x You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Free 1040x To exclude a gain, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date it was destroyed. Free 1040x For information on this exclusion, see Publication 523. Free 1040x If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. Free 1040x See Postponement of Gain , later. Free 1040x Reporting a gain. Free 1040x   You generally must report your gain as income in the year you receive the reimbursement. Free 1040x However, you do not have to report your gain if you meet certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next. Free 1040x   For information on how to report a gain, see How To Report Gains and Losses , later. Free 1040x    If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. Free 1040x See 10% Rule under Deduction Limits, earlier. Free 1040x Postponement of Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. Free 1040x Your basis in the new property is generally the same as your adjusted basis in the property it replaces. Free 1040x You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. Free 1040x However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. Free 1040x You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. Free 1040x See Controlling interest in a corporation , later. Free 1040x If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. Free 1040x To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. Free 1040x If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. Free 1040x Example. Free 1040x In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. Free 1040x You made no further improvements or additions to it. Free 1040x When a storm destroyed the cottage this January, the cottage was worth $250,000. Free 1040x You received $146,000 from the insurance company in March. Free 1040x You had a gain of $128,000 ($146,000 − $18,000). Free 1040x You spent $144,000 to rebuild the cottage. Free 1040x Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. Free 1040x Buying replacement property from a related person. Free 1040x   You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). Free 1040x This rule applies to the following taxpayers. Free 1040x C corporations. Free 1040x Partnerships in which more than 50% of the capital or profits interests is owned by C corporations. Free 1040x All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000. Free 1040x For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. Free 1040x If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Free 1040x If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Free 1040x Exception. Free 1040x   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the destroyed or stolen property. Free 1040x Related persons. Free 1040x   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. Free 1040x For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Free 1040x Death of a taxpayer. Free 1040x   If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. Free 1040x The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by buying replacement property. Free 1040x Replacement Property You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. Free 1040x Property you acquire as a gift or inheritance does not qualify. Free 1040x You do not have to use the same funds you receive as