Ask the Advocate: Tax consequences of rolling blackouts
|Continued from page 4|
In agricultural businesses,
increases in goods lost, livestock injured or dead, etc. as a result of
power interruptions to systems providing cooling, heating, water, etc.
Q: Generally, when would such expenses/losses be allowed (tax year incurred)?
A: Expenses and losses are allowed in the taxable year in which they are incurred. Theft losses are allowed in the taxable year they are discovered. Personal expenses are not deductible. So nonbusiness expenses or losses must meet the requirements of a casualty or theft loss to be deductible.
Q: Are such expenses/losses deductible for federal purposes?
A: Generally, yes. California incorporates the federal provisions for deducting business expenses and losses (Internal Revenue Code 162, 165/California Personal Income Tax Law 17201, 24347, and 24343) California follows the same rules for reporting spoilage or loss of inventory, casualties and thefts.
Q: How are such expenses/losses reported on the tax return?
A: Expenses are reported as any other ordinary and necessary business expense. Here are some general guidelines:
Your C Corporation clients would report expenses on a Schedule F, Computation of Income, filed along with a corporate tax return. They would report inventory losses in the Cost of Goods Sold section (Schedule V). They would report any casualty or theft losses on IRS Form 4684, Casualties and Thefts and include it with the California return.
Your sole proprietor clients would report expenses on a Schedule C, filed with a personal tax return. They would report any casualty or theft losses on IRS Form 4684, Casualties and Thefts and include it with the California return.
Q: Can any losses be carried over or reported in years other than the year the loss was incurred?
A: Losses and expenses are reported in the year they are incurred. If they result in a net operating loss, the net operating loss can generally be carried over for five years.
Q: What type of documentation would you require?
A: The blackouts themselves will not create different substantiation requirements. Businesses are expected to keep documentation of items purchased, sold, lost, or disposed of while operating a business. For personal casualty losses, taxpayers should be able to substantiate that they owned the property, the adjusted basis of the property, any repair costs, or decrease in fair market value.
For more information refer to IRS Pubs 535, Business Expenses, 547, Casualties, 552, Record Keeping, and 536 NOL.
|More situations, consequences of blackouts|
Here are a few hypothetical blackout situations and the state tax consequence for each.
Situation 1: Poultry and egg farmers use fans and water to cool the
barns housing their birds. During a blackout, they lose some of their
birds due to overheating.
Situation 2: Restaurant's perishable food items spoil during a blackout.
Tax consequence: Loss of inventory. Requires an adjustment in cost of goods sold on tax return.
Situation 3: Caterer cannot cater an event because of blackout.
(Food preparation halted resulting in spoilage) Caterer loses client
and doesn't get paid remaining balance.
Situation 4: Retail store cannot conduct business during the
blackout and loses potential sales.