There are times when business owners abandon assets or when assets suffer casualty losses. In either event, small business should take note because there is likely a deduction that can be taken.
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Every once in a while one or more items of business property may no longer be useful: that old machine that broke down for the very last time or a truck that’s ready for a trade in but you wouldn’t be able to get a dollar for it. When this happens, you may claim an abandonment loss on your income tax return.
It’s important to let your tax pro know that you have abandoned an asset.
For the IRS to judge a bona fide abandonment, you must show intent to abandon the asset, and you must overtly act to abandon the asset. It gets picky about this two-pronged test. You cannot merely set aside a piece of equipment and call it abandoned
-the IRS might see there’s a potential for future use. A mere reduction in value is not grounds for an abandonment loss either. The item must be destroyed, donated to charity or converted to personal use.
Items other than vehicles and equipment may be subject to abandonment. You may be able to take an abandonment loss for the cost of a set of plans you paid for with the idea of an expansion that never occurred.
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Double dipping is not allowed: You cannot take the cost of the plans as a business expense then turn around and take it again as an abandonment loss.
Note that you can also deduct the abandonment of a partnership interest.
A fire, a ravaging storm, theft, a shipwreck: these are all casualty losses. A sudden, unexpected occurrence that renders your business property useless will result in a write off. Note that deterioration or obsolescence is not considered a casualty loss.
There is a formula to determine your loss, but note one of the factors in the formula is adjusted basis. Your adjusted basis is basically the difference between your cost plus improvements less depreciation taken. For example: you purchase a laptop computer for $1,000, you spend another $500 to add additional RAM and USB ports. Since the purchase you have deducted $700 in depreciation on your tax return. Your adjusted basis is $800 ($1,000+$500-$700).
Let’s say that someone stole this laptop that you use 100% for business purposes. Your insurance company reimbursed you $500. You would have a deductible business loss of $300. Here’s the actual formula: cost or adjusted basis less the insurance reimbursement, which you compare to the fair market value of the asset and claim the smaller of the two as your deduction.
Using the same scenario, let’s say the fair market value of the computer is only $700 rather than $800. If that is the case, the loss would be $200.
This can sometimes result in a gain if you had written off the entire cost of the asset using Section 179 or bonus depreciation or because you have otherwise taken full depreciation on the asset. The gain is taxable. Using the same example, let’s say you took Section 179 deduction for the full amount you paid for the computer - $1,500. Your adjusted basis is zero. The insurance company reimbursed you $500. You would have a taxable gain of $500.
You may take this deduction on your business tax return – Schedule C if you are a sole proprietor. For more information refer to IRS Publication 584-B
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.