The havoc wrought by the hurricanes in the Gulf resulted in federal legislation, the Katrina Emergency Tax Relief Act of 2005, aimed largely at individuals impacted by the devastation of Katrina. That law permitted chiropractors to withdraw penalty-free from IRAs and other qualified retirement plans funds that could be used to keep their practices afloat.

The law expanded the work-opportunity tax credit and the new-employee-retention credit. The law also extended the non-recognition of the gain-replacement period.

A second bill, one that will provide more financial assistance to affected businesses in all of 2005’s major disaster areas, remained tied up in Congress at the time of publication of this article.

The Internal Revenue Service did not wait for Congress and provided help in their unique manner. That help took the form of postponed deadlines for the filing of many tax and information returns as well as later deadlines for the payment of taxes by many of those affected.

However, it is our basic tax law, the Internal Revenue Code, that continues to provide the bulk of relief for chiropractors and their chiropractic practices — even those who suffer losses in areas that do not receive the publicity given recent disasters.

CASUALTY LOSSES

What qualifies for a tax-deductible casualty loss?

• Lost, damaged, or destroyed property. Generally, the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual, qualify as a casualty loss — if you can prove that a loss occurred and can put a value on the amount of that loss.

Simply misplacing or losing property does not qualify as a tax-deductible casualty, even though an insurance company may consider it a reimbursable loss. Naturally, if property is lost in conjunction with another accident or casualty, it may qualify.

• Embezzled or stolen money. Also labeled as casualty losses are embezzled or stolen money. The theft loss is the amount actually stolen. In the case of stolen business or income-producing property, the loss is the adjusted basis of the property stolen.

With casualty losses, the rules limit the tax deduction amount to the lesser of:

1. The difference between the fair market value (FMV) of the property immediately before the casualty and its FMV immediately after, or

2. The adjusted basis (book value) of the property immediately before the casualty.

Obviously, if your practice or income-producing property is totally destroyed, the amount of the casualty loss is the adjusted basis of the property regardless of its FMV.

When there is damage to different kinds of practice or business property, losses are computed separately for each identifiable property damaged or destroyed.

PROVING THE UNTHINKABLE

To claim a tax deduction for a casualty loss, you often have to prove:

Naturally, for you to claim the casualty-loss deduction, you must have owned the property. Therefore, your practice cannot claim a loss for the destruction of property owned by its principal or manager. If more than one person owned the property, the loss is allocated among the owners in proportion to their ownership interests.

(Remember: If a lease or rental agreement for property used in the practice requires payment for any damages resulting from a casualty, then that loss, too, will qualify as a casualty loss.)

Proving the book value or basis of business property is generally not a problem, provided your practice’s records have not also been lost. The tax-deductible loss is usually the property’s original cost, plus any additions or subtractions to the basis made for tax or accounting purposes.

For damaged property, the casualty loss is usually the cost of cleaning it up or repairing it to bring it back to its condition before the casualty. This is a measure of the difference in fair market value (FMV) before and after the casualty so long as the repairs do not actually increase the property’s value above its pre-casualty value.

GAINING FROM A LOSS

Surprisingly, if you suffer a loss, you may find that you can profit from it. If, for example, the amount of the insurance reimbursement you receive is more than the adjusted basis of the destroyed or damaged property, you may realize a gain.

Fortunately, even if you realize a gain, you may not have to pay taxes on it right away. You may be able to defer the gain to a later year (or perhaps indefinitely) if you have purchased qualified replacement property.

A gain is calculated by subtracting all expenses incurred in obtaining the reimbursement (such as the expenses of hiring an independent insurance adjuster) from the reimbursement.

Then, if you spent the same amount as the rest of the insurance money you received to repair or restore the property or to purchase replacement property, you may postpone tax on the gain indefinitely. Of course, you must make the replacement within two years of the end of the tax year the gain was realized.

The replacement property must be similar or related in use to the property destroyed. If the property was investment real estate, then other investment real estate will qualify as a replacement.

If, however, the property was business- or income-producing property located in a federally declared disaster area, any business-use property will qualify.

DISASTER BUSINESS LOSSES

The tax laws contain a special rule for losses incurred from a federal disaster area. For those losses, you have the option to:

• Deduct the loss on the tax return for the year in which the loss occurred; or

• To deduct the loss on the tax return for the preceding tax year.

Unless Congress comes up with other tax-relief measures, the basic tax rules governing casualty losses can go a long way toward helping ease the financial burden of many chiropractors — and their practices — resulting from casualty losses.

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer, and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal or accounting advice. Please consult your professional advisor about issues related to your practice.