About 25 percent of businesses never reopen after a disaster, according to FEMA. If yours survives the fire, the flood, or the break-in, the next threat is quieter: paying tax as if you still owned property that is now ash, scrap, or gone. Every year, business owners shrink their own deductions by measuring the loss wrong, claiming it in the wrong year, or failing to document what they lost.
This guide covers the casualty and theft loss rules for business property: what counts, how to measure the loss, how insurance proceeds interact with the deduction, the election that lets you claim this year's disaster on last year's return, and the FEMA and SBA paperwork that follows. The rules below track IRS Publication 547, the IRS's comprehensive guide to casualties, disasters, and thefts.
What Counts as a Casualty or Theft Loss
Casualties must be sudden, unexpected, and unusual
A casualty is damage, destruction, or loss of property from an identifiable event that is sudden, unexpected, or unusual. Fires, floods, storms, earthquakes, vandalism, car accidents, and burst pipes all qualify. A sudden roof collapse from a snowstorm is a casualty; the slow weakening of that same roof by years of wind and weather is progressive deterioration, and it is never deductible.
The "sudden" requirement produces some fine lines worth knowing. The rust and wear that cause a water heater to burst are not a casualty, but the water damage the burst does to your floors and inventory is. Termite damage is not a casualty, but a sudden, unexpected insect infestation can be. Damage you cause on purpose, or through willful negligence, never qualifies.
Theft covers more than break-ins
A theft is the taking of money or property with intent to deprive you of it, where the taking is illegal under state law and done with criminal intent. You do not need a conviction. Burglary, robbery, larceny, extortion, and embezzlement all count, and fraud or misrepresentation counts as theft if it is illegal under state or local law. That last point matters for businesses: a vendor who takes your deposit and disappears may have handed you a theft loss, not just a bad debt.
What does not count: the simple disappearance of property. If inventory walks away and you cannot show it was stolen, you have shrinkage, not a theft loss. This is why police reports matter, as discussed below.
The rule that favors businesses
Here is the single most important distinction in this area. For tax years beginning after 2017, an individual's casualty or theft loss on personal-use property is deductible only if it is attributable to a federally declared disaster, and even then it must clear a $100-per-event floor and a 10%-of-AGI floor.
Business and income-producing property losses play by the older, kinder rules. If a burst pipe floods your warehouse, a thief empties your equipment cage, or a storm totals your delivery van, the loss is deductible whether or not the President declared anything. No $100 floor, no 10% of AGI haircut. Business losses are computed on Section B of Form 4684 and flow to Form 4797, completely outside the personal-use limits. If you run a business from damaged property, getting the business-versus-personal classification right is worth real money.
How to Figure the Loss
Destroyed or stolen business property: start with basis, not value
When business or income-producing property is stolen or completely destroyed, the fair market value is irrelevant. Your loss is:
Adjusted basis − salvage value − insurance and other reimbursements
Adjusted basis is generally what you paid for the property, plus improvements, minus depreciation deductions and prior casualty losses. Depreciation is where owners get surprised: equipment you bought for $50,000 and have depreciated down to a $10,000 basis produces at most a $10,000 loss, no matter what a replacement costs today.
Consider a bakery whose delivery van is totaled in a flood. The van cost $24,000 new, and depreciation has brought its adjusted basis to $9,000. The insurer pays $7,000 and the wreck brings $500 in salvage. The deductible loss is $1,500 ($9,000 − $500 − $7,000), not the $17,000 shortfall between the van's original price and the insurance check. Painful, but that is the rule.
Partially damaged property: the smaller of basis or lost value
If the property is damaged but not destroyed, compute the decrease in fair market value (value immediately before minus value immediately after) and take the smaller of that decrease or your adjusted basis. Then subtract reimbursements. Appraisals establish FMV, and repair costs can serve as evidence of the decline if the repairs merely restore the property to its pre-casualty condition.
Figure each item separately
A single storm that damages your building, your signage, and three machines is not one loss computation. You must figure the loss on each item separately and then combine them. For personal-use real estate the entire property counts as one item, but business property gets no such shortcut, which is another reason itemized asset records matter.
Inventory gets two methods, but you must pick one
Casualty or theft of inventory, including goods held for sale, can be deducted in either of two ways. You can let the loss flow through cost of goods sold by properly reporting opening and closing inventories, in which case any reimbursement goes into gross income. Or you can deduct the loss separately, adjusting opening inventory or purchases downward so the same goods are not counted twice, and reducing the loss (but not gross income) by the reimbursement. What you cannot do is take the loss through cost of goods sold and also claim it as a casualty loss. Pick a lane.
Leased property
If you lease equipment or space and the lease makes you liable for casualty damage, your loss is the amount you must pay to repair the property, minus any reimbursement you receive or expect. Keep the lease clause with your tax file; it is the document that proves the loss is yours rather than the lessor's.
Insurance and Reimbursements: The Timing Trap
Expected reimbursements reduce the loss now
You must subtract not only reimbursements received but reimbursements you reasonably expect to receive. Worse, if a claim with a reasonable prospect of recovery is still open, the loss is not sustained at all until you know with reasonable certainty what the insurer will pay. A storm in December with a claim that settles the following October generally produces a deduction in the settlement year, not the storm year. Owners who deduct the full damage in year one and get the check in year two have the timing exactly backwards.
File the claim or lose the deduction
If your property is covered by insurance, file a timely claim. If you do not, you cannot deduct the covered portion of the loss at all; only the part your policy would never have paid, such as your deductible, remains deductible. Skipping a claim to protect your premiums is a legitimate business decision, but understand the price: the unclaimed covered amount is not a tax deduction.
Money that arrives after you deduct
If you properly deduct a loss and a reimbursement arrives in a later year, the recovery generally goes into income in the year received, to the extent the earlier deduction reduced your tax. Track every deducted loss with an open tail so a surprise settlement check does not become an unreported-income problem.
Sometimes insurance creates a gain
If the reimbursement exceeds your adjusted basis, you have a taxable gain even though you feel poorer. The bakery van above would produce a gain if the insurer paid $12,000 against a $9,000 basis. You can usually postpone reporting that gain by buying replacement property that is similar or related in service or use. The replacement period generally ends two years after the close of the first tax year in which any part of the gain is realized. To defer all of the gain, the replacement must cost at least as much as the reimbursement; spend less and the unspent difference is taxable. Replacement property bought from a related person generally does not qualify.
The Disaster-Year Election: Deduct This Year's Loss on Last Year's Return
If your loss is attributable to a federally declared disaster and occurred in a county eligible for public or individual assistance, Section 165(i) gives you a choice: deduct the loss in the disaster year, or elect to claim it on the return for the immediately preceding tax year. For a cash-strapped business, amending last year's return to generate a refund now is often worth more than a bigger deduction later.
The mechanics, from IRS Publication 547:
- Deadline. Make the election on or before six months after the regular due date (without extensions) for the disaster-year return. For calendar-year filers, a 2025 disaster loss can be pushed back to the 2024 return as late as October 15, 2026.
- How. Complete Section D of the prior-year Form 4684 and attach it to the prior-year return or amended return claiming the loss. Enter the FEMA DR or EM declaration number on the form.
- Switching years. If you already deducted the loss in the disaster year, you must amend that return to remove it no later than when you file the preceding-year return claiming it.
- Revocation. You can revoke the election by filing an amended preceding-year return with Section D, Part II, within 90 days after the election deadline, and you must pay any resulting tax plus interest.
- Measure under the prior year's rules. Unless you have a qualified disaster loss, figure the deduction as if the casualty occurred in the preceding year.
Run the numbers both ways before electing. The preceding year may have higher income (making the deduction more valuable), but it may also have lower rates or competing losses. The election is a math problem, not a reflex.
How to Report the Loss
Business and income-producing property losses go on Form 4684, Section B, and then flow to Form 4797. Whether the net result gets ordinary or Section 1231 treatment depends on how long you held the property and on the netting of all your business gains and losses for the year. If the damaged property was depreciable property held more than a year, part of any gain may be recaptured as ordinary income. Partnerships and S corporations have their own reporting lines in the Form 4684 instructions. The IRS publishes a dedicated Business Casualty, Disaster, and Theft Loss Workbook (Publication 584-B) for listing damaged business property and computing the loss item by item.
Prove it like an auditor is already assigned
To deduct any casualty or theft loss you must show the property was yours (or that your lease made you liable), what happened and when, that the loss directly resulted from the event, and whether any reimbursement claim exists. Build the file before memories fade: photos and video of the damage, purchase invoices and depreciation schedules, appraisals, repair estimates, police reports for thefts, and every letter to and from the insurer. If the disaster destroyed your records too, the IRS accepts other satisfactory evidence, but reconstructed records are always weaker than contemporaneous ones.
The Recovery Paperwork: FEMA, the SBA, and the IRS Are Three Different Doors
FEMA helps households; businesses go to the SBA
FEMA's Individual Assistance program serves individuals and households, not businesses. A business owner applies to FEMA for personal housing and personal-property needs through DisasterAssistance.gov or 1-800-621-3362, and a FEMA application routinely generates a referral to the Small Business Administration for the business side. Do not skip the SBA application because you assume you will be denied or do not want a loan: for disasters declared on or after March 22, 2024, completing it does not affect FEMA eligibility, and it is the gateway to the main federal business recovery money.
SBA disaster loans: the terms that matter
Businesses of all sizes can borrow up to $2 million in combined physical-damage and economic-injury loans per disaster. Physical disaster loans repair or replace damaged real estate, machinery, equipment, and inventory. Economic Injury Disaster Loans supply working capital, including payroll and bills, and are available even if the business suffered no physical damage at all.
Interest rates run as low as 4 percent for businesses, terms stretch up to 30 years, and payments typically begin 12 months after the first disbursement. Applications run through the SBA's disaster assistance portal, and each disaster carries its own filing deadlines for physical damage and economic injury, so check the declaration for your county rather than assuming you have time.
Relief money has its own tax rules
Not every recovery dollar is taxed, but businesses get less shelter than individuals:
- Federal Stafford Act grants for necessary personal, household, and medical expenses are excluded from income, and you cannot also deduct the reimbursed loss.
- Qualified disaster relief payments are excluded from individuals' income and exempt from income, self-employment, and employment taxes. Payments to businesses generally do not qualify.
- State grants to businesses for disaster property losses are taxable income, not excludable gifts or capital contributions, though you may be able to postpone gain by buying qualifying replacement property.
- Income replacement payments, including lost business income and unemployment assistance, are taxable.
The IRS may give you more time
The IRS can postpone filing and payment deadlines for up to a year for taxpayers in a covered disaster area, including businesses whose principal place of business is there and anyone whose tax records are maintained there. For disasters occurring after July 24, 2025, a mandatory 120-day postponement applies to income, excise, and employment tax deadlines. Postponements are announced per disaster, so verify your county's relief rather than assuming the extension.
Seven Mistakes That Cost Real Money
- Deducting value instead of basis. Destroyed business property is measured by adjusted basis, never by replacement cost or sentiment.
- Forgetting depreciation. Every depreciation deduction you ever took shrank the basis that caps today's loss.
- Double-counting inventory. Through cost of goods sold or as a separate deduction, never both.
- Skipping the insurance claim. The covered-but-unclaimed portion is simply not deductible.
- Deducting before the claim settles. An open claim with a reasonable prospect of recovery means no sustained loss yet.
- Missing the election deadline. Six months after the disaster-year due date, the prior-year option expires.
- Documenting nothing. Reconstructing basis and damage from memory, months later, is how legitimate losses die in examination.
Your Books Are Part of Your Disaster Plan
Notice how every computation in this guide starts from the same place: adjusted basis, depreciation history, improvement receipts, inventory counts, lease terms. Those are bookkeeping artifacts. A business with per-asset purchase records and current depreciation schedules can compute its Form 4684 the week after the storm; a business with a shoebox of faded receipts is still reconstructing basis when the election deadline passes.
Paper records burn and flood along with everything else. Keeping your ledger in plain text under version control means the records that prove your loss live everywhere your repository lives, not in the filing cabinet that floated away. If you are setting up that kind of system, the guides in /docs/ walk through plain-text accounting from first principles, and /fava/ shows how the same data feeds dashboards you can use to track the recovery itself. The best time to disaster-proof your books was before the storm; the second-best time is this week.
Keep Your Financial Records Disaster-Proof
Recovering from a disaster means proving what you owned, what it was worth for tax purposes, and what you spent to rebuild, often while operating out of temporary space. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data, with records you can back up, version, and carry anywhere. Get started for free and make your books the one asset no storm can take.
