North Bay wildfire losses hit businesses differently from individuals
The firestorm that hit the North Bay in October had huge consequences for many homeowners and businesses, including tax implications.
We interviewed Aaron Tompkins, a CPA and senior manager in the tax section of Moss Adams in Santa Rosa, about how to handle fire-related casualty losses using Form 4684. The Moss Adams building, the topmost structure of Fountaingrove Center on Round Barn Blvd., did not burn, but fire scorched trees and landscaping next to it. Moss Adams was unable to use the space for more than three weeks.
Yes. About every 30 seconds we hear trucks rumbling down full of debris. It's nonstop. I'm surprised how quickly they have worked. I expected it to take longer. The magnitude - there is so much to be done.
It's not a super-difficult form. If a business has equipment, a car, a building, the first step is to figure out if you have a casualty gain or loss.
Exactly. To make that calculation, basis (amount paid for property) is important. If the insurance reimbursement is more than the basis, it's a gain and you're done. If insurance proceeds are less than the basis and the property was not fully destroyed, then you have to figure fair-market value before and after the fire. The deduction is the lesser of the drop (in value between current value after fire and either basis or market value before fire, minus insurance payout). You can never deduct more than your basis.
Insurance has been very responsive. People are already getting insurance reimbursements. Claims are being paid.
Yes. We have a number of clients who were affected, more homeowners than businesses. On the business side, it's primarily clients with rental property in Fountaingrove or Coffey Park. We have quite a few. Most had sufficient insurance. They're going to be on the casualty-gain side. They have to figure out if they're going to keep the cash and pay tax, or reinvest.
Exactly. The tax code has rules that apply to casualty gains that will get you out of that tax for now. You can roll it into replacement property. On the business side, rules are very favorable. You don't have to roll it into something exactly the same.
Yes. In a federally declared disaster area, which this is, you have to reinvest in other business property under Section 1033. Normal rules that would apply to a 1031 exchange are relaxed in a federally declared disaster area. You have business property that was destroyed, insurance reimbursement comes in. If there's a gain, you can invest in totally different business property.
I don't have anybody pushing that envelope as long as they're reinvesting in the business.
Exactly. Once we figure out we have a loss, we can take that loss on upcoming 2017 tax returns or, because we're in a federally declared disaster area, go back and amend 2016 returns. We get to pick.
Let's say you decide to amend the 2016 return and you're able to totally wipe out income and create a loss. You can carry the loss back two more years, to 2015 and 2014, use those deductions against that income. If you are a small business with less than $5 million of average annual gross receipts or a farming business, you can carry back three years (including 2013). The event occurred in 2017 but you're able to go back a number of years.
Yes. In order to be a disaster area, it has to be a big event.
I don't know if there is a specified threshold. It is presidentially declared. I assume it is discretionary. Once it's declared, another set of rules kick in, especially on the business side. There are no limitations on disaster losses. On the gain side you have the ability to reinvest and expand what you can invest into with replacement property. You defer that gain. You have some basis issues on the reinvestment. If you had a piece of machinery worth $500,000, totally destroyed, and you got a $600,000 insurance reimbursement.
Yes. You invest that $600,000 into new machinery. Under normal rules, you would have $600,000 of basis. But when you are deferring gain (insurance from a casualty), you have to reduce your basis to what it was before ($500,000). The rules are trying to put you in the same position as you were before.
There is a tricky area. You are supposed to do this property-by-property.
Yes. Determine the basis for each property, the change in fair-market value, the insurance reimbursement. Form 4684 has individual lines for each property. You sum together each item rather than doing it in aggregate. You can end up with different results than you might think.
Yes. The way you go about it is a little different. With homes, for example, the home is the main structure. What's around it, the shrubbery, it's all one property. For business, each thing is separate.
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