Preliminary Thoughts on the Tax Implications of Hurricane Irma

September 21, 2017

Preliminary Thoughts on the Tax Implications of Hurricane Irma
by Gerard H. Schreiber, Jr., CPA, and Valrie Chambers, CPA, Ph.D

Hurricane Irma has brought about unique circumstances never seen before. We are accustomed to hurricanes as recently experienced with Allison, Katrina, Rita, Wilma, Gustav, Ike and Isaac. The catastrophic damage and flooding from Hurricane Irma is an event no one anticipated would happen.
This will review topics associated with the filing of returns for taxpayers affected by disasters:

  • Basics of a casualty loss
  • Individual casualty losses
  • Business casualty losses
  • Involuntary conversions for personal residences and business property
  • Code Section 121 exclusion
  • Personal belongings
  • FEMA payments
  • Code Section 165(i) election

Casualty Losses
Casualty losses result from damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. Some common examples include fire, hurricane, earthquake, tornado, auto accident and drought. There are unusual instances also like a diamond ring that was lost when falling in a sink. The most important item in computing a casualty loss is the taxpayer’s basis in the property. For individuals, this can be a difficult amount to determine. For businesses, the basis should be in the taxpayer’s records because generally they are claiming depreciation on the business asset. Insurance reimbursements and other similar payments like payments from an employer’s emergency disaster fund that must be used to replace damaged property are also used in calculating casualty losses. However, payments from social welfare agencies and in-kind services such as free meals, medical supplies and shelter are generally not taxable.

Individual Casualty Losses
Individual casualty losses will generally include the taxpayer’s personal residence, vacation home or homes, and the personal property owned by the taxpayer located in and around the personal residence or vacation home.

The AICPA Casualty Loss Practice Guide and the IRS FAQs for Disaster Victims  are the two most important resources in assisting clients to compute their casualty losses.

In addition, a complete listing of property and casualty insurance companies and contact information is available at: http://www.iii.org/articles/insurance-company-claims-filing-telephone-numbers.html