Casualty and Disaster Losses for a Business
How a hurricane, flood, fire, or theft loss is measured and deducted by a business, the election that moves the deduction to last year's return, and the relief that comes with a federal disaster declaration.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A business deducts a casualty loss — hurricane, flood, fire, or theft damage — equal to the lesser of the property's adjusted basis or the decline in its value, minus insurance recovered. Business losses have no floor and no disaster-declaration requirement. After a federal disaster declaration, the loss can be deducted on the prior year's return and deadlines are postponed.
On this page
How is the loss measured?
| Property | Loss amount |
|---|---|
| Fully destroyed business property | Adjusted basis minus salvage value and insurance |
| Partially damaged property | Lesser of adjusted basis or the decline in fair market value, minus insurance; repair cost is accepted as evidence of the decline if repairs restore the property to its prior condition |
| Inventory | Either through cost of goods sold (insurance is then income) or as a separate casualty loss after removing the items from cost of goods sold (insurance then reduces the loss) — not both |
| Leased property you are liable to repair | The amount you must pay to repair it, minus insurance |
| Lost profits | Not a casualty loss; business interruption insurance is income |
Appraisals, photographs, repair estimates, and the fixed asset schedule are the evidence.
When is it deducted?
In the year the loss occurs, except that a loss attributable to a federally declared disaster in an area warranting federal assistance may be deducted on the return for the preceding year, by original or amended return, if elected by six months after the original due date (without extensions) of the return for the disaster year. For a September 2026 hurricane, a calendar-year business can claim the loss on its 2025 return — amending it if already filed — and receive the refund in months rather than waiting for the 2026 return. Losses reimbursed later are income when received if they were deducted.
What other relief comes with a federal declaration?
- Postponed filing and payment deadlines for taxpayers in the affected area, announced by the IRS for each disaster.
- Qualified disaster relief payments from an employer to employees for reasonable living and repair costs are tax-free to the employee and deductible to the business.
- Abatement of penalties on payroll and excise tax deposits due in a short window (typically about two weeks) after the disaster begins, if made by a date the IRS sets; deposits themselves are not postponed.
- Expanded replacement property rules for deferring gain on insurance proceeds.
- Free copies of prior returns and transcripts.
What about personal losses for the owner?
Personal casualty losses are deductible only when attributable to a federally declared disaster, with a $100 floor per event and a 10 percent of adjusted gross income threshold (losses from qualifying presidentially declared major disasters instead have a $500 floor and no 10 percent threshold); the 2025 law made that limitation permanent and, for tax years beginning after 2025, also allows losses from certain state-declared disasters. A loss on a home office or a vehicle used partly for business is split between the business and personal portions.
Frequently asked questions
Do I need a police report for a theft loss?
Documentation that a theft occurred — a police report, insurance claim, or similar evidence — is expected, and the loss is deducted in the year the theft is discovered.
Can I deduct the cost of cleanup?
Cleanup costs are generally deductible as business expenses; they are not part of the casualty loss itself, though costs of restoring damaged property may have to be capitalized.
What if the insurance company has not paid by year-end?
Reduce the loss by the amount you reasonably expect to recover; adjust when the claim settles.
Does the loss reduce basis?
Yes. The basis of damaged property is reduced by the loss deducted and the insurance received, then increased by repairs capitalized.
Official sources
The IRS explains: “You must generally deduct a casualty loss in the disaster year. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can elect to deduct that loss on your return or amended return for the tax year immediately preceding the disaster year.” — Internal Revenue Service, Publication 547 (2025), Casualties, Disasters, and Thefts, https://www.irs.gov/publications/p547
The IRS explains: “Find information on the most recent tax relief provisions for taxpayers affected by disaster situations.” — Internal Revenue Service, Tax relief in disaster situations, https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk files the prior-year election after a declared disaster so the refund arrives while rebuilding is under way. See pricing or book a free fit call.
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