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Wilmington NC CPA discusses IRS Form 4684 – Casualties and Thefts – pertaining to Corrosive Drywall

CPA firm Wilmington NC - Form 4684 - Casualties and Thefts

Gary Bode, CPA: if you fall out of your comfort zone when preparing Form 4684, consider calling us for a free initial consult at 399-2705.

IRS Form 4684, Casualties and Thefts, can be extended to cover costs of replacing corrosive drywall, and repairing associated damage, through IRS Revenue Procedure 2010-36.  Folks usually think of a casualty loss in terms of a natural disaster, like hurricanes.  But taxpayers can miss out on tax deductions in other types of legitimate situations, like losses through Ponzi schemes, for example, which is just a fancy form of theft (and not limited to NYC either).

There is a two step corrosive drywall identification process, which I would carefully document in case the IRS tax audits your Form 4684.  Corrosive drywall defies the usual IRS characteristics of deductible casualties and thefts.  But Revenue Procedure 2010-36 delineates how the special circumstances of corrosive drywall can still qualify, by modifying the usual and customary casualty loss and theft requirements.

  • The problem develops over time, gradually blackening electrical wiring and emitting hydrogen sulfide.  Usually your loss has to be sudden.
  • You can claim a loss on IRS Form 4684 this year, even though the damage may have occurred in prior tax years.  Usually your loss is deductible in the year it occurred.
  • Your loss on Form 4684 is generally the amount of repairs you pay for.  Usually there are complex property tax basis calculations required.
  • You can claim 75% of the expected loss now, even if you expect partial insurance reimbursement in the future.  But you might have claim over reimbursement as income in later tax years.

“The IRS responds to taxpayer needs.  Special application of Form 4684 to corrosive drywall damage through Revenue Procedure 2010-36 is a good example.  But the actual dollar amount of tax reduction, after applying all required tax calculation steps, is often less than the public’s perception.”
-Gary Bode, Wilmington NC CPA tax accountant

IRS Revenue Procedure 2010-36 is an example of the IRS responding to the common problem of Chinese drywall creating unexpected repair and replacement losses.  But like many IRS issues, it sounds great, but may not actually help the taxpayer to the extent the public perceives.  Here’s such an example for IRS Form 4684.

Taxpayer couple A paid $10,000 during the tax year for repairs related to corrosive drywall.  They have an insurance claim pending.  Their Adjusted Gross Income on Form 1040 is $40,000.

  • Because a claim is pending, 75% of the $10,000 paid is the gross casualty amount on Form 4684.
  • Next this gross casualty amount is decreased by $100. 75% (10,000) – 100 = $7,400.
  • Finally, 10% of the 40,000 AGI is deducted making the allowable loss $3,400.
  • The $3,400 is carried to Line 20 of their Schedule A, Itemized Deductions, of Form 1040.
  • Because the total amount of their itemized deductions on Schedule A is less than their standard deduction, they would take the standard deduction and get no specific additional benefit from the corrosive drywall repair cost of $10,000.

We’re a proactive CPA firm in Wilmington NC.  But serve a much broader geographic base. Please read any of our posts to gauge our expertise and empathetic customer service.  If you’d like a free initial consult for an accounting or tax preparation issue, please call us at (910) 399-2705.

Here’s an IRS blurb on this same subject.

IRS Provides Relief for Homeowners with Corrosive Drywall

IR-2010-102, Sept. 30, 2010

WASHINGTON — The Internal Revenue Service today issued guidance providing relief to homeowners who have suffered property losses due to the effects of certain imported drywall installed in homes between 2001 and 2009.

Revenue Procedure 2010-36 enables affected taxpayers to treat damages from corrosive drywall as a casualty loss and provides a ”safe harbor” formula for determining the amount of the loss.

In numerous instances, homeowners with certain imported drywall have reported blackening or corrosion of copper electrical wiring and copper components of household appliances, as well as the presence of sulfur gas odors. In November 2009, the Consumer Product Safety Commission (CPSC) reported that an indoor air study of a sample of 51 homes found a strong association between the problem drywall, levels of hydrogen sulfide in those homes and corrosion of metals in those homes.

Revenue Procedure 2010-36 provides the following relief:

• Individuals who pay to repair damage to their personal residences or household appliances resulting from corrosive drywall may treat the amount paid as a casualty loss in the year of payment.

• Taxpayers who have already filed their income tax return for the year of payment generally have three years to file an amended return and claim the deduction. The amount of a loss that may be claimed depends on whether the taxpayer has a pending claim for reimbursement (or intends to pursue reimbursement) of the loss through property insurance, litigation or otherwise.

• In cases where a taxpayer does not have a pending claim for reimbursement, the taxpayer may claim as a loss all unreimbursed amounts paid during the taxable year to repair damage to the taxpayer’s personal residence and household appliances resulting from corrosive drywall.

• If a taxpayer does have a pending claim (or intends to pursue reimbursement), a taxpayer may claim a loss for 75 percent of the unreimbursed amount paid during the taxable year to repair damage to the taxpayer’s personal residence and household appliances that resulted from corrosive drywall.

A taxpayer who has been fully reimbursed before filing a return for the year the loss was sustained may not claim a loss. A taxpayer who has a pending claim for reimbursement (or intends to pursue reimbursement) may have income or an additional deduction in subsequent taxable years depending on the actual amount of reimbursement received.

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