It depends on what type of business entity you have and how the loss will be reported on your tax return. If you have a C Corporation and file Form 1120, the loss if creating a net loss is Net Operating Loss reported on this return. Then, it needs to follow the NOL rule to be carried back to previous years first unless you chose to forego the carry back option. Even if this is the first year of business, make such a declaration on your tax return anyway.
If you have a Schedule C and/or S Corporation entity, the loss is reported and/or flowed to your personal tax return. If it caused a net operating loss, you have to carry back first before it can be carried forward. Even if this is your first year in business, if the loss is flowed to and reported to your personal tax return, you still need to carry back first. I am not sure we have a choice to forego personal casualty loss carry back. I had a case before that the IRS told us repeatedly, and we were very careful not to lose out on the carry back. At that time, when the carry back is lost, it would be deemed to be lost forever for that year.
To be eligible for casualty loss on a tax return, there are many steps the taxpayer needs to take to validate the loss. For example, filing of police report, filing of insurance report, and even filing in court against the responsible party. We cannot use the IRS as the recovery source. In the meantime, we need to protect the statute of limitation of claiming the loss on the tax return.
To handle reporting and tax consequence of a major casualty loss is very complicated. Please retain professional help from such as a CPA and professional return preparer as soon as possible.
The citations and website links below are for your further reference. Please feel free to follow up.
Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP
Theft Losses - A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent.
The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.
Insurance or Other Reimbursements
You must reduce the loss, whether it is a casualty or theft loss, by any salvage value and by any insurance or other reimbursement you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation. For more information about the basis of property, refer to Topic 703, Publication 547, Casualties, Disasters, and Thefts, and Publication 551, Basis of Assets. You may determine the decrease in fair market value by appraisal, or if certain conditions are met, by the cost of repairing the property. For more information, refer to Publication 547.
Claiming the Loss
Individuals are required to claim their casualty and theft losses as an itemized deduction on Form 1040, Schedule A (PDF), Itemized Deductions, (or Schedule A in Form 1040NR (PDF), if you are a nonresident alien). For property held by you for personal use, you must subtract $100 from each casualty or theft event that occurred during the year after you have subtracted any salvage value and any insurance or other reimbursement. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year. Report casualty and theft losses on Form 4684 (PDF), Casualties and Thefts. Use Section A for personal-use property and Section B for business or income-producing property. If personal-use property was damaged, destroyed or stolen, you may wish to refer to Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). For losses involving business-use property, refer to Publication 584-B (PDF), Business Casualty, Disaster, and Theft Loss Workbook. These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records.