The IRS Wants Proof
This year has seen many natural disasters, including hurricanes that caused major flooding along our coasts and wildfires in many states. Recently, there have been numerous slight earthquakes (who knows when “the big one” will happen?). Add the every-day occurrences of fires and thefts that cause loss of personal property in your home or business, and it’s highly likely you or someone you know have had or will have a loss.
After the fact is not the ideal time to find out that you are either uninsured or underinsured. Nor is it the time to “try” to remember everything you used to own. Having a prepared inventory prior to needing one is a move toward protecting yourself or your business from financial loss.
Insufficient insurance can equal financial loss
An insufficient insurance settlement most often results in a financial setback. If this happens to you, you might be able to claim tax deductions for at least some of your loss. This deduction usually requires a professional valuation of your property before and after the loss or damage. Having detailed records and an inventory of your property and possessions helps to strengthen your claim for this loss.
Here are the steps to complete this:
- Calculate your “adjusted basis” on the property – this is your original cost and additional capital improvements you made during ownership, less depreciation deductions and any previous casualty write-offs that you have claimed.
- Subtract the funds you received or expect to receive from your insurance company.
- Also subtract $100 from each loss (the IRS disallows write-offs for the first $100).
- Subtract 10% of your AGI (adjusted gross income) for the same year as your loss to reach your final tax deduction.
Many exceptions and complications may apply, so good record keeping will be a great benefit. The United States Tax Court states that it will “bear heavily” against taxpayers basing their loss estimates on personal recollection. Therefore, having a prepared home or business inventory prior to a loss will remove the need for the “personal recollection.” For more information, visit the FAQs for Disaster Victims on the IRS website. If you will be filing for a tax deduction of uninsured personal property, contact your accountant for assistance.
A favorable return on your investment
If you don’t want to take on this daunting task of compiling a home or business inventory yourself, the cost of hiring a certified inventory service professional will most likely prove to be a favorable return on your investment as a result of receiving a more equitable insurance claim.
But what if you never need to refer to your inventory? It will have been a small price to pay for the peace of mind it provided. And that is a wise investment in itself!