Adams' Biz Musings
For my Texans: Casualty Losses 101
I'll cover the basics of casualty losses as they specifically relate to the personal victims of Hurricane Harvey and how you can potentially FILE FOR TAX REFUNDS NOW by filing amended returns for 2016.
The following is a breakdown (a la En Vogue, but by the time I'm done, you're gonna get it). I'll cover the basics of casualty losses as they specifically relate to the personal victims of Hurricane Harvey and how you can potentially FILE FOR TAX REFUNDS NOW by filing amended returns for 2016. IRS publication 547 covers casualty losses in detail so I will provide the highlights hoping that it will give enough information to decide if you have experienced a casualty loss and how to proceed.
What is a casualty loss as it relates to Hurricane Harvey?
A casualty loss is a deductible property loss that you can claim on your tax return. Casualty losses occur when property is damaged, destroyed or lost due to a disaster (in this case Hurricane Harvey and the ensuing floods) AND you suffer a net financial loss. For example, if your home was damaged in the storm, you have experienced a casualty. You have experienced a casualty loss if the smaller of the cost basis or the fair market value exceeds any reimbursement (insurance or otherwise) you have received for that loss.
Let me explain the math using a television as an example (it's a bit simpler than a house): if you purchased an HDTV last year for $800, that is the cost basis of the TV. One year later, the day of the loss, fair market value (FMV) of that TV is $600. You receive an insurance reimbursement of $200 for the TV. For the purposes of deductible casualty losses, you would consider the smaller of the cost basis or the FMV, which in this example is the $600 fair market value of the TV. You then subtract the $200 reimbursement from the FMV and end up with a casualty loss of $400.
The calculations for FMV can be quite specific depending on the type of property and how the loss occurred (in the case of Harvey, there are specific guidelines for federally declared disaster areas).
Are there limitations for the kinds of personal property that a loss can be claimed for?
Almost any type of personal property is eligible for a casualty loss claim from bicycles to VCRs. There are some specific exclusions which are as follows: family pets, items burned in an intentionally set fire (don't rid yourself of destroyed household goods in a bonfire...could cause issues), willfully negligent car accidents and progressive deterioration (damage from steady operation...in other words, if you have damage, claim it now and don't wait for it to get progressively worse over time).
What information do I need to prove I had a loss?
The following are required to claim a casualty loss:
- The type of casualty (car accident, fire, storm, etc.) and when it occurred
- That the loss was a direct result of the casualty
- 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
- Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
I lost everything. Can I just claim one large casualty loss or do I have to breakdown every item that was damaged, destroyed or lost?
Unfortunately, every item for which you want to claim a casualty loss has to be figured separately. This is obviously a daunting task but I don't expect that the IRS will ease this rule in any future issuances of Harvey Relief. As a roadmap, please see IRS publication 584. It is essentially a workbook with many items written in to give you a template for where to begin.
When can I claim the casualty losses I incurred due to Harvey?
There's some good news here! While IRS guidelines generally mandate that disaster losses must be claimed in the year they occurred, the IRS has granted relief and will allow the losses to be claimed either on your 2017 return OR on an amended 2016 return. The best approach takes some diagnostics of your individual tax situation, however, filing an amended 2016 return could be advantageous if you paid tax in 2016. You can amend the return to include the casualty loss and generate a refund. You would get a refund check/direct deposit essentially recouping taxes you already paid for 2016. If you choose to amend your 2016 return, you have 6 months form the date of the loss to file the amended return containing the casualty loss.
There you have it...the basics of casualty losses as they apply to Hurricane Harvey. I believe this is enough for most to decide if they are in a position to claim a casualty loss. My thoughts are with all those who were victim to this behemoth storm. Hopefully this provides you with some information that can be of use as you being to rebuild.
Information contained within is subject to change and should always be confirmed with your tax professional prior to use.
Resources/Sources (some are duplicates in intra-text links):
IRS Publication 547: Casualties, Disasters and Thefts
IRS Publication 584: Casualty, Disaster and Theft Loss Workbook
IRS memo issuing allowance to file amended 2016 return for casualty loss
IRS page with all Harvey relief info
Author:
Adam Ditsky, CPA
President, Ditsky Strategic
Can I get paid to an LLC (or other type of pass-through entity)?
The most popular question I've received since the unveiling of the new tax proposal is, "Can I get paid to an LLC by my employer"?
The most popular question I've received since the unveiling of the new tax proposal is, "Can I get paid to an LLC by my employer"? First and foremost, as I've said in previous posts, we have no idea what the final tax plan will look like. So, for now, some gentle review of potential outcomes is worthwhile but don't spend too much time researching anything in particular and certainly don't make any firm tax planning moves based on the one-page proposal from the White House. If you do have to make any decisions now try and choose options that allow for flexibility.
I know, this is really fun, right? Just wait...we might bust out some sparklers later!
The situation: you are an employee of a company and paid a w-2 salary, replete with federal, state and perhaps local withholdings and FICA and FICA MED deductions. You, too, want to pay the proposed 15% federal corporate tax rate! I don't think you'll love the answer.
There are a few issues with having an employer pay an employee as an LLC. You should, of course, contact your friendly tax professional for advice about your specific situation. In general, employers have to follow very specific guidelines about employee classification. In the vast majority of cases, those who work for an employer are employees and must be paid as w-2, salaried employees. An easy, but unofficial, test for employee classification is simply 'Does this person act like a normal employee...do they have a desk, do they have defined hours, etc.'. Very simply put, if it looks like a duck, walks like a duck and sounds like a duck, it's probably a duck (if you're more comfortable using another animal in your analogies, say a badger for example, feel free...the premise doesn't change).
The primary reason for rigid employee classification rules is that the IRS/Social Security Admin does't want to lose out on employer paid employment taxes (FICA, FICA MED). You might be thinking to yourself 'I thought those who receive profits from their LLCs have to pay the FICA and FICA MED via self-employment taxes on their personal returns.' (Kudos if thats what you were thinking...if it wasn't, go do some research and have a 2 page, double-spaced summary paper in my inbox by tomorrow). That thought is, indeed, accurate. Self-employment tax is 15.3% because it is designed to make up for both the employer and employees share of the payroll taxes. However, LLCs aren't the only type of pass-through entity.
S-corporations are a second entity type that passes income (or loss) through to the owner/s. There are several differences between these 2 types of corporations, but we'll just focus on the self-employment tax for now. Profits passed through from S-corps are not subject to self-employment tax. However, S-corps, unlike LLCs, are supposed to issue salaries to it's owners. The salary has FICA and FICA MED withheld and paid by the corporation just as if the owners were employees for any other company would. Owners of S-corps usually receive a combination of salary and pass-through income. The issue with S-corps from a tax collection standpoint under the new tax proposal, which I will barely stick my toe in the water on here, is that owners will try and drive down salaries and jack up pass-through income. This will drive down tax revenue. More stringent guidelines will be needed on the 'reasonable' salary required by the IRS to police this potential issue. This is certainly more complex than that, but it is an issue and it's final presentation will guide tax planning for the coming years.
A final point worth considering: what is lost by not being a w-2 employee and having income paid to a pass-through entity? Medical insurance, transit checks, 401(k) and other employee benefits are available to salaried employees only. Those benefits go by the wayside if you are not paid as a w-2 employee.
The point to all of this...if you want to have your income paid to pass-through entity (LLC, S-corp, etc.), you need to have a legitimate business. If you are an employee of a company and currently receive a w-2 salary, it's highly unlikely that you'll be able to have your income redirected to a pass-through entity.
Here is an article from Bloomberg on this topic as well...sheds some add'l and different light than my musings.
Author:
Adam Ditsky, CPA
President, Ditsky Strategic