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 Ok, here's the bad news - many of us either already have had or will have the experience of getting something stolen from us personally or from our business. But, here is the good news – the IRS realizes this and allows for a deduction when this happens to you.
According to the IRS guidelines there are three kinds of theft:
- Losses incurred in a trade or business
- Losses from a transaction for profit, but not connected with a trade or business.
- Losses that do not fall into either of the categories above (personal property theft)
Theft of trade or business property can be fully deducted after taking into account any insurance reimbursement received. Thefts of income producing property (i.e. securities) are deducted as itemized deductions not subject to the 2 percent of adjusted gross income (AGI) limitation. Personal property theft is deductible to the extent that it exceeds $100 per occurrence and the aggregate of all theft losses during the year exceed 10 percent of AGI.
The burden of proof lies with the taxpayer when claiming a theft deduction. The taxpayer must show the following:
- The loss was caused by theft
- The amount of the loss
- The year in which the loss was discovered
The IRS's definition of theft includes the idea of criminal intent. Several court rulings have disallowed a deduction to taxpayers who cannot find their personal property and assert that it has been stolen, but lack proof of the actual crime.
Theft in the eyes of the IRS isn't always simple. Other issues such as theft vs. bad debt and classifications of items stolen add wrinkles to deducting what might clearly appear to be theft losses.
Keep in mind that good physical controls as well as internal controls in place at your business and home can help lower your risk of being a victim of theft. In the unfortunate event you lose property due to theft, contact your Rea advisor for assistance in how to account for this loss.
-By Jeremy Senften, CPA (Senior Accountant, Mentor office)
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