Publication 3833: Disaster Tax Relief Explained

IRS Publication 547, Casualties, Disasters, and Thefts, is a guide for individuals and businesses impacted by casualty events. It explains the tax law provisions available for recovery after a disaster, helping taxpayers navigate the financial aftermath by using specific relief measures.

Defining a Federally Declared Disaster

The availability of special tax relief is contingent upon an official designation known as a “federally declared disaster.” This refers to a situation that the President of the United States has determined warrants federal assistance under the Stafford Act. Such a declaration unlocks various forms of federal aid, including the tax provisions administered by the IRS. Taxpayers can verify if an event qualifies by checking the Federal Emergency Management Agency (FEMA) or IRS websites, as relief is tied to specific geographic areas and time periods.

Tax Relief for Individuals

For tax years through 2025, the rules for deducting personal casualty losses are significantly restricted. Individuals may only claim a deduction for personal casualty losses if the losses occurred in a federally declared disaster. An exception allows a taxpayer with personal casualty gains to deduct losses not attributable to a federally declared disaster, but only up to the amount of those gains.

When personal property is damaged or destroyed in a federally declared disaster, individuals may be able to claim a casualty loss deduction. To calculate this loss, a taxpayer must determine the decrease in the property’s fair market value (FMV). The deductible loss is the lesser of the decrease in FMV or the property’s adjusted basis. This amount must then be reduced by any insurance or other reimbursements.

The final deductible amount for personal casualty losses is subject to certain limitations. For most federally declared disasters, each casualty loss must be reduced by $100, and the total of all casualty losses for the year is deductible only to the extent that it exceeds 10% of the taxpayer’s adjusted gross income (AGI). For certain major disasters, Congress may provide more favorable relief for “qualified disaster losses.” In these cases, the 10% of AGI limitation is waived, the reduction per casualty is increased to $500, and taxpayers can claim these losses even if they do not itemize.

If a main home in a federally declared disaster area is damaged or destroyed, any gain from insurance proceeds that exceed the home’s adjusted basis may be postponed. This allows homeowners to defer tax on the gain if they reinvest the proceeds in a replacement home within a specified period, which is generally four years.

Tax Relief for Businesses

Businesses suffering property damage from a federally declared disaster can claim casualty losses for assets such as buildings, machinery, and equipment. The loss calculation is similar to the method used for personal property and is reduced by any insurance or other reimbursements.

A loss of inventory is accounted for through the cost of goods sold (COGS). By properly reflecting the opening and closing inventory values, the cost of the destroyed or damaged goods is automatically included in COGS for the year. This method reduces the business’s gross income and simplifies the process.

When a business receives insurance proceeds that exceed the adjusted basis of the destroyed property, a gain may occur. This situation is known as an “involuntary conversion.” The tax on this gain can be deferred if the business reinvests the proceeds into similar replacement property within a certain period, generally two years.

Procedural and Administrative Relief

Following a federally declared disaster, the IRS often provides procedural and administrative relief. This frequently includes an automatic extension of time to file various tax returns and make tax payments. The extension period can provide several additional months for those in the designated disaster area to meet their obligations without penalty.

A choice for taxpayers is when to claim the deduction for a casualty loss. They can either deduct the loss on the tax return for the year in which the disaster occurred or elect to deduct it on the return for the immediately preceding year. Claiming the loss on the prior year’s return by filing an amended return can result in a faster tax refund.

Reconstructing records is a common challenge after a disaster. IRS Publication 547 provides guidance on how to substantiate a loss when original documents are destroyed. The IRS allows for reasonable reconstructions of records, and taxpayers can use various methods, such as obtaining statements from financial institutions to support their claims.