February '18

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196 • RV PRO • February 2018 rv-pro.com B U S I N E S S The IRS measures the amount of damage to property using a very conservative yardstick. An RV business must use the lesser of: • The property's adjusted tax basis immediately before the loss, or • The property's decline in fair market value as a result of the casualty. Disaster Business Losses Generally, casualty losses must be deducted in the year in which the loss occurred. However, to help cushion losses suf- fered by RV businesses and others, the tax laws contain a special rule for disaster losses in an area subsequently determined by the president of the United States to warrant federal assistance. For those losses, the RV professional, business owner or man- ager has the option of: • Deducting the loss on the tax return for the year in which the loss occurred, or • Choosing to deduct the loss on the tax return for the preceding tax year. In other words, an RV business professional has the option of deciding whether their loss would be most beneficial used to offset the current year's tax bill or better used to reduce the pre- vious year's tax bill – generating a refund of previously paid taxes. In order to accomplish this, the RV business simply files an amended tax return for the preceding year, figuring the loss and the change in taxes exactly as if the loss actually occurred in that preceding year. While this choice must be made by the due date (not including extensions) for the tax return of the year the loss actually occurred, the resulting refund can go a long way to helping the damaged RV business recover. Proving a Loss is Required After each disaster, the IRS reminds taxpayers of the need for records to support loss claims. In order to claim a casualty loss deduction, an RV dealer, distributor, manufacturer or sup- plier must be prepared to prove, not only that property was lost in a casualty, but also the amount of the loss. This requires a knowledge of – and documentation to support – a number of factors including: • That the RV business owned the property • The amount of the book value or "basis" in the prop- erty. Adjusted basis for property is generally equal to the cost of acquiring it, plus the cost of any improve- ments and minus any depreciation deductions or earlier casualty losses. • The pre-disaster value of the asset • The reduction in value caused by the disaster • The lack or insufficiency of reimbursement to cover the loss. And, most importantly: • The one bearing the risk of loss must be the owner or co-owner of the property. Obviously, the best way to document a loss, especially disaster losses, is to file an insurance claim. However, even insurance companies require documentation. To help when records have been lost or destroyed, the IRS has an excellent tool: "Disaster Assistance Self-Study – Record Reconstruction" available at: www.irs.gov/businesses/small-businesses-self-employed/ disaster-assistance-self-study-record-reconstruction Gaining from a Loss As mentioned, some RV dealers, distributors, manufac- turers and suppliers actually profit from casualty losses. If, for instance, the amount of the insurance reimbursement received is more than the book value or adjusted basis of the destroyed or damaged property, there may actually be a gain. The fact a gain exists does not necessarily mean that it will be taxable right away. Most businesses are able to defer the gain to a later year (or perhaps indefinitely) simply by acquiring "qualified replacement property." In calculating that gain, any expenses incurred in obtaining the reimbursement, such as the expenses of hiring an inde- pendent insurance adjuster, are subtracted. Then, if the same amount as the rest of the insurance money received was spent either repairing or restoring the property or in purchasing replacement property, tax on the gain may be postponed. Of course, the replacement must occur within two years of the tax year when the gain was realized. Handle with Care Losses come in many forms, even from excessive tax deduc- tions. If an RV business has too many tax deductions and too little income, a net operating loss (NOL) results. The NOL carryback period is usually the two years preceding the loss year and then forward to the 20 years following the loss year. A three-year carryback period exists for so-called "eligible" losses, including the portion of a NOL relating to casualty and theft losses. There also are those losses that can be controlled. Quite simply, a loss is allowed for the abandonment of an asset. If a depreciable business asset, or income-producing asset, loses its usefulness and is subsequently abandoned, the loss is equal to its adjusted basis. And, best of all, this type of loss applies to the abandonment of a business. Far more common are those occasions when business prop- erty is taken, legally or illegally, often as a result of a natural disaster. The government may, for example, legally take property by the simple act of "condemnation." The loss of any business property by actions outside the control of the RV business professional are usually labeled as "involuntary" conversions. These actions are unusual in that they frequently result in a taxable gain. Fortunately, the rules governing involuntary conversions, permit the property to be replaced with property of a "like kind," eliminating the need to report and pay taxes on that gain.

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