What is considered a loss from theft for tax purposes?
It is important to differentiate between deductions for losses caused by theft or casualty. Casualty losses come from sudden, unexpected events like vandalism, or floods, tornadoes, hurricanes, and other federally declared disasters. While small business owners may be able to take tax deductions for both types of losses, theft-related losses are treated differently. Business-related theft can occur in several different ways:
- An office or business may be burglarized after hours, with the perpetrators making off with items like electronics, equipment, cash, unsold product, customer records, or even a business vehicle.
- A robbery occurs during business hours or when you or your employees are present.
- Embezzlement is more common and can go unnoticed, where a trusted employee or independent contractor manages to falsify financial records and illegally transfer assets or property into their own name or otherwise convert business property for personal use.
- Theft can also include hacking, stealing business assets, or extortion.
Are small business theft losses incurred in 2023 deductible?
If you had business losses in 2022 due to theft, you may be able to take a tax deduction for those losses. Generally, small business owners can take deductions for the adjusted basis of the stolen property, minus any reimbursements or restitution received or expected.
The adjusted tax basis is usually the original cost of the stolen property plus improvements to it, minus any amount you have previously claimed as depreciation deductions for the stolen item. You cannot claim a tax deduction that is larger than your adjusted basis minus reimbursements. If the tax deduction for business property losses due to theft exceeds your taxable income in the year you claim it, you may have a net operating loss (NOL).
Your tax professional can help you determine the maximum amount you are eligible for in tax deductions for stolen property.
What are the requirements for deducting theft losses on taxes?
If the stolen business property was insured, you may still be able to take a tax deduction for the loss. However, you are required to reduce the amount of the loss claimed by the total amount of insurance proceeds you received (or expect to receive) after filing a claim.
Most business owners have records that serve to document their basis in the stolen property. Many will document thefts and other losses in an Incident Report. For example, if burglars stole computers from your office space, you could use your purchase records to show the original cost of the equipment as well as any upgrades or added peripherals. If these purchase receipts or records were also stolen, the IRS may accept other evidence of the value of the property to support your losses. However, purchase orders or receipts can help limit unnecessary scrutiny of your claimed theft deduction.
Regardless of whether the theft occurred through a burglary, embezzlement, or by some other means, it is best practice to contact law enforcement as soon as you become aware of the incident. Filing a police report serves to document your losses and is often a requirement for filing claims with business insurance companies after losses occur.
In general, you can deduct your losses related to the theft of business property using IRS Form 4684 in the year you discover the theft. However, if you believe you have a reasonable claim to reimbursement of the stolen property, either through insurance claims, salvage value, or otherwise, you cannot take a tax deduction until the tax year when you are able to determine whether you will actually receive reimbursement for some or all of your stolen property.
How can I claim a theft loss on a tax return?
If you had business losses due to theft and are confident that you know the amount of any insurance payout, salvage amount, or restitution you may receive, use the following steps to claim the loss as a tax deduction.
Step 1: Determine the amount of your loss.
Ultimately, if you want to claim a tax deduction for business property theft, be prepared to prove:
- The amount you lost.
- The date you discovered the theft.
- The theft was a criminal act in the state where it occurred.
IRS Publication 584-B (Business Casualty, Disaster, and Theft Loss Workbook) is designed to help taxpayers ascertain the amount of their available losses and tax deduction(s) related to casualty and theft. This workbook includes schedules and more detailed information about losses related to stolen information systems and technology, motor vehicles, office supplies, equipment, office furniture, and more.
Complete all relevant workbook schedules to document your losses and to identify whether you have a loss or a net capital gain related to the casualty or theft. To complete the worksheets, the following information is required:
- The cost or adjusted basis in the property.
- The amount of any insurance or other reimbursement.
- The fair market value of the property prior to and after any casualty event.
If you have a net casualty or theft loss, proceed with claiming a theft loss deduction on your tax return. Note that if you have a capital gain because insurance payments or other reimbursement amounts exceeded the cost or adjusted basis, you will likely need to include the amount of such gain in your taxable income.
Step 2: Claim your business property theft losses on your tax return.
Use IRS Form 4684 to report your losses due to theft (business casualty losses may be reported on Schedule A as itemized deductions or, in some cases, on Schedule C). While Form 4684 is used for both personal and business casualty and theft losses, small business owners generally use section B of the form to report their losses related to business assets or income-producing property.
If you are claiming deductions for more than one business-related theft in the same tax year, complete a separate Section B, Part I for each incident. Then, combine all incidents onto one Section B, Part II. The Instructions to Form 4684 provide line-by-line guidance to help taxpayers calculate and report their deductions correctly.
Step 3: Maintain documentation to support your theft loss claim.
Finally, be sure to retain all of the documentation you used when claiming tax deductions for losses due to theft of business property. Keep this information with your income tax return and other records for the tax year in which you claim the deduction. As discussed earlier, it’s best to include documentation of the adjusted basis you used when calculating your loss, details about when the theft was identified, and documentation of insurance claim determinations, court-mandated restitution, and salvage value for stolen property recovered at a later date.
Deductions, credits, and other tax relief can be complex, especially for entrepreneurs and small business owners. Talking to your tax professional can help you maximize the deductions you can take for these and other losses. If you need tax help, Rocket Lawyer can now match you with a Tax Pro for affordable and convenient tax filing services. Leave your taxes to a pro with Rocket Tax! If you have legal questions related to your business, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
