Mark owns an architectural firm in a North Carolina region that Hurricane Helene flooded badly and will not be able to deal with company or individual federal taxes for some time. Will he still owe a penalty?
The IRS announced that Hurricane Helene victims in all of North Carolina have until May 1, 2025, to file various federal individual and business tax returns and make tax payments.
The May 1, 2025, deadline also applies to any payments due during this period, including quarterly estimated taxes due on January 15 and April 15, 2025, and quarterly payroll and excise tax returns normally due on October 31, 2024, January 31, 2025, and April 30, 2025.
The IRS automatically identifies taxpayers located in the disaster area and applies filing and payment relief. But if you live or have a business located outside the covered disaster area call the IRS disaster hotline at 866-562-5227 to request relief.
Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.
A business may be able to claim a federal income tax deduction for a theft loss. But does embezzlement count as theft? In most cases it does but you’ll have to substantiate the loss. A recent U.S. Tax Court decision illustrates how that’s sometimes difficult to do.
Basic rules for theft losses
The tax code allows a deduction for losses sustained during the taxable year and not compensated by insurance or other means. The term “theft” is broadly defined to include larceny, embezzlement and robbery. In general, a loss is regarded as arising from theft only if there’s a criminal element to the appropriation of a taxpayer’s property.
In order to claim a theft loss deduction, a taxpayer must prove:
The amount of the loss,
The date the loss was discovered, and
That a theft occurred under the law of the jurisdiction where the alleged loss occurred.
Facts of the recent court case
Years ago, the taxpayer cofounded an S corporation with another shareholder. At the time of the alleged embezzlement, the other original shareholder was no longer a shareholder, and she wasn’t supposed to be compensated by the business. However, according to court records, she continued to manage the S corporation’s books and records.
The taxpayer suffered an illness that prevented him from working for most of the year in question. During this time, the former shareholder paid herself $166,494. Later, the taxpayer filed a civil suit in a California court alleging that the woman had misappropriated funds from the business.
On an amended tax return, the corporation reported a $166,494 theft loss due to the embezzlement. The IRS denied the deduction. After looking at the embezzlement definition under California state law, the Tax Court agreed with the IRS.
The Tax Court stated that the taxpayer didn’t offer evidence that the former shareholder “acted with the intent to defraud,” and the taxpayer didn’t show that the corporation “experienced a theft meeting the elements of embezzlement under California law.”
The IRS and the court also denied the taxpayer’s alternate argument that the corporation should be allowed to claim a compensation deduction for the amount of money the former shareholder paid herself. The court stated that the taxpayer didn’t provide evidence that the woman was entitled to be paid compensation from the corporation and therefore, the corporation wasn’t entitled to a compensation deduction. (TC Memo 2021-66)
How to proceed if you’re victimized
If your business is victimized by theft, embezzlement or internal fraud, you may be able to claim a tax deduction for the loss. Keep in mind that a deductible loss can only be claimed for the year in which the loss is discovered, and that you must meet other tax-law requirements. Keep records to substantiate the claimed theft loss, including when you discovered the loss. If you receive an insurance payment or other reimbursement for the loss, that amount must be subtracted when computing the deductible loss for tax purposes. Contact us with any questions you may have about theft and casualty loss deductions.
On average, only 40 to 60 percent of businesses recover after a disaster, according to FEMA. That is why having a disaster recovery and business continuity plan at the ready is so important. If you don’t have written plans to help you get back to business after the recent shutdown, take notes so you can draft them later.
THE NEW NORMAL
The COVID-19 pandemic is very different from a flood or fire, triggering creative adjustments to a typical recovery plan. For example, the need for safe distancing and a sanitized environment for those who must be at the workplace is completely new. Employees continuing to work from home longer may add a new twist, too.
FINANCIAL ASSISTANCE
Financial aid is common during disaster recovery, but this time it’s different. If you received a federal loan, make sure you follow the rules to the letter. Stay apprised of any new assistance packages and be prepared to apply quickly.
CRITICAL SUPPLIERS
Identify which of your vendors could jeopardize your business and develop a contingency plan in case they are unable to deliver needed goods or services.
REDEFINE SERVICES
Chances are that some businesses may not look the same as they emerge from the COVID-19 lockdown. If your business model doesn’t seem sustainable, get creative and act quickly.
CHECK INSURANCE COVERAGE
Business interruption insurance is generally very important after a disaster. However, this time insurers have been reluctant to pay claims because company operations were interrupted due to a government-mandated shutdown of non-essential businesses, not a natural disaster. If you have insurance, stay updated on the status of your claim. If you do not have business interruption insurance, apply for coverage as soon as you are back up and running. Also, take time to refine your business recovery plan because you never know if a natural disaster could strike.
