BGBC Partners, LLP Tax Update: Documenting Theft Losses
As a business owner, you are aware that despite taking precautionary measures to prevent a theft loss, the reality is that there is still a possibility that you may fall victim to predatory thieves. To make matters worse, you may lose out on a deduction if you don’t have proper support to substantiate the theft loss. In this segment of our Tax Update we will review the deduction for theft losses, and recommend approaches to document the existence of the loss for tax purposes.
As we discussed in a recent segment, the tax code approaches tax losses from theft, casualty and disaster events in a similar manner, and the discussion below applies generally to all three.
Individuals may claim a deduction for theft losses only if they file a form 1040 tax return and itemize their tax deductions. The theft loss (after reduction for any insurance proceeds received) that may be claimed is the lesser of:- The adjusted basis of the property (the cost of the property including additions and improvements less any depreciation) immediately prior to the event, or
- The decline in the property’s value (its FMV immediately before the event less its FMV immediately after the event
Also for individuals, the theft loss is then reduced by $100 per loss event plus 10% of the individual’s adjusted gross income.
For corporations and partnerships, the deductible theft loss calculation is simpler. The amount of loss the business is eligible to deduct is the lesser of:- The decrease in the FMV of the property because of the casualty event (if not destroyed completely), or
- The adjusted basis (net book value) of the property immediately before the event
Theft losses are defined as the taking and removing money or property with the intent to deprive the owner of it. As you know, unfortunately thefts like these happen in grocery stores all the time. Items such as food, magazines, phone chargers, etc. are all items that can be stolen. These items are easy to conceal and even easier to overlook.
While you’re doing an audit at your store you may find out some items are missing in your inventory. If you want to claim a casualty and theft loss there are certain requirements that must be meet. IRS Publication 547 provides the following guidance:
Theft loss proof. For a theft loss, you should be able to show all the following:
When you discovered that your property was missing.
That your property was stolen.
That you were the owner of the property.
Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
It is important that you have records that will prove your deduction. If you don't have the actual records to support your deduction, you can use other satisfactory evidence to support it.
Original invoices, photographs after the theft, police reports and other evidence should be gathered at the time the theft is first discovered.
If you believe you have been a victim of a theft loss, check with an experienced CPA to ensure that the correct amount is deducted, and the proper support is in place in case of an audit.
