How to Claim a Business Casualty Loss Deduction: Rules and Reporting

A business casualty loss deduction lets you write off the uncompensated value of business property destroyed or damaged by a sudden event like a fire, storm, flood, or theft. The deduction sits under Section 165 of the Internal Revenue Code, reduces taxable income in the year the loss is sustained, and comes with none of the dollar floors or income thresholds that apply to personal casualty losses.¹ Claiming it correctly comes down to three things: confirming the event qualifies, running the right calculation, and reporting it on Form 4684.

What Counts as a Business Casualty

The IRS applies a three-part test. The event must be sudden, unexpected, and unusual.² Sudden means the damage happens quickly rather than over weeks or months. Unexpected means you didn’t anticipate or intend it. Unusual means it isn’t part of the ordinary risks of operating in your location.

Hurricanes, tornadoes, earthquakes, floods, fires, volcanic eruptions, and vandalism all qualify. So do car accidents that damage a delivery vehicle, a burst pipe that floods a warehouse overnight, and a lightning strike that takes out equipment. Theft qualifies too, with a timing difference discussed below.

Gradual damage fails the test. Termite infestations that develop over years, slow water seepage, rust, drought stress, and ordinary wear and tear are maintenance problems, not casualties, no matter how expensive the fix.² Damage you caused through your own willful negligence doesn’t qualify either.

One boundary worth naming up front: the per-event dollar floor and the 10% adjusted-gross-income threshold you may have read about apply only to personal-use property owned by individuals. Business property is not subject to either.¹ Every dollar of uncompensated business casualty loss is deductible.

Calculating the Loss

The formula changes depending on whether the property was partially damaged or completely destroyed. Using the wrong one is one of the most common errors on casualty claims.

Partially Damaged Property

For property that was damaged but not destroyed, the deductible loss is the lesser of two figures:³

Your adjusted basis in the property (original cost minus any depreciation already claimed), or
The decrease in fair market value (market value immediately before the casualty minus market value immediately after).

Take the smaller number, then subtract any insurance or other reimbursement you received or expect to receive. The remainder is your deduction. The “lesser of” rule ties the write-off to your actual economic investment rather than unrealized appreciation.

The drop in fair market value usually calls for a qualified appraisal. The IRS also accepts the reasonable cost of repairs as evidence of the decrease, provided the repairs do nothing more than restore the property to its pre-casualty condition.³

Totally Destroyed or Stolen Property

When business property is completely destroyed or stolen, skip the fair-market-value comparison. The loss equals your adjusted basis minus salvage value minus any insurance or other reimbursement.⁴ There’s no “after” value when the property is gone.

Fully Depreciated Property

If you’ve already claimed the full cost of an asset through depreciation, your adjusted basis is zero and so is the deductible loss, regardless of what the property was worth.² You’ve already recovered the cost through prior deductions. If insurance pays out on a fully depreciated asset, the payment is a taxable gain rather than a wash. In that situation, Section 1033 allows you to defer the gain by reinvesting the proceeds in similar replacement property within a set period, but that is a separate election from the loss deduction covered here.

Subtracting Insurance and Other Reimbursements

Any insurance payment, disaster relief grant, or other reimbursement you receive or reasonably expect to receive reduces the loss before you claim it. This applies even if the money hasn’t arrived by the time you file. Estimate the expected payout and reduce your deduction accordingly.

If the final settlement differs from your estimate, file an amended return: Form 1040-X for individuals and sole proprietors, Form 1120-X for corporations.²

One trap: if you’re covered by insurance and choose not to file a claim, you can’t deduct the portion of the loss the policy would have paid. The IRS treats voluntary non-collection the same as actual receipt.⁵

Reporting the Loss on Your Return

Every business casualty loss starts on Form 4684, Casualties and Thefts, Section B, which is dedicated to business and income-producing property.⁶ Use a separate Section B, Part I for each event. Part II combines the results.

Where the net figure goes next depends on your entity type:⁵

Sole proprietors and individual filers transfer the amount to Form 4797 (Sales of Business Property). If Form 4797 isn’t otherwise required, you can enter it directly on Schedule 1 (Form 1040), line 4.
Partnerships report it on Form 1065, Schedule K, line 13e, and pass it through to partners on Schedule K-1.
S corporations report it on Form 1120-S, Schedule K, line 12e.
C corporations report it on Form 1120, with long-term gains or losses following the instructions for Schedule D.

The loss is generally treated as an ordinary deduction, which offsets income dollar for dollar without the annual capital loss limitations.

When to Take the Deduction

A casualty loss is deducted in the year the loss was sustained, which is normally the year the event happened. Theft is different. You deduct a theft loss in the year the theft was discovered, even if the property went missing earlier.² Inventory taken in 2024 but not discovered missing until March 2026 goes on the 2026 return.

Federally Declared Disasters: Two Extra Benefits

If your loss comes from a Presidentially declared disaster under the Stafford Act, two additional options open up.

Claim the Loss on Last Year’s Return

Section 165(i) lets you deduct a qualifying disaster loss on the return for the tax year before the disaster occurred.¹ A business damaged by a hurricane in August 2026 could amend its 2025 return, claim the loss there, and receive a refund from taxes already paid rather than waiting until the 2026 return is filed. That timing matters when the business needs cash to rebuild.

To elect, complete Section D of Form 4684 and attach it to an amended return (Form 1040-X or Form 1120-X) for the prior year.⁷ The election must be made by the due date (including extensions) of the return for the year the disaster actually occurred. Verify that your specific location is inside the declared area; not every county in a storm’s path is covered.

Automatic Filing and Payment Extensions

The IRS automatically postpones filing and payment deadlines for taxpayers whose address of record is in a covered disaster area. No application is required. The postponement generally covers individual, corporate, partnership, S corporation, and trust returns, as well as estimated tax payments due in the relief window. If your records are in the disaster area but your address isn’t, or if you’re a relief worker assisting there, call the IRS disaster hotline at 866-562-5227 to request the same treatment.

The length of the extension varies by event and is announced on the IRS disaster relief page.⁸ Several months past the original due date is common.

When the Loss Exceeds Your Income

A large casualty can wipe out your business income for the year with room to spare. Two rules govern what happens next.

First, a net operating loss. When deductions including the casualty exceed gross income, the excess becomes an NOL. Under current rules, an NOL arising in 2026 carries forward indefinitely but cannot be carried back.⁹ In any future year, the NOL deduction is capped at 80% of that year’s taxable income calculated before the NOL. The remaining 20% stays taxable. Use older NOLs before newer ones.

Second, the excess business loss limitation. Noncorporate taxpayers (sole proprietors, partners, S corporation shareholders) face an additional cap under Section 461(l). For 2026, business losses exceeding your business income plus $256,000 ($512,000 for joint filers) are “excess business losses” that can’t be deducted currently.¹⁰ The disallowed amount rolls into an NOL carryforward subject to the 80% rule. The thresholds adjust for inflation annually. This limitation applies through tax years beginning before January 1, 2027. Corporations aren’t subject to it and can use the full casualty loss against current-year income.

Documentation

Auditors rarely dispute whether a tornado happened. They dispute the numbers. Build a file that supports every entry on Form 4684: purchase receipts, depreciation schedules, photos and video from before and after the event, repair invoices, professional appraisals, and insurance claim correspondence. For theft, include the police report and any communication with law enforcement about recovery.

State treatment varies. Most states follow the federal rules, but some impose additional limitations or require separate calculations. Check your state’s conformity rules before assuming the federal deduction carries over.

1
Office of the Law Revision Counsel. 26 USC 165 – Losses
2
Internal Revenue Service. Topic No. 515, Casualty, Disaster, and Theft Losses
3
eCFR. 26 CFR 1.165-7 – Casualty Losses
4
Internal Revenue Service. Publication 547, Casualties, Disasters, and Thefts
5
Internal Revenue Service. Instructions for Form 4684
6
Internal Revenue Service. About Form 4684, Casualties and Thefts
7
Internal Revenue Service. FAQs for Disaster Victims
8
Internal Revenue Service. Disaster Victims in Twelve States Have Automatic Extensions to File and Pay Their Taxes
9
Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
10
Office of the Law Revision Counsel. 26 USC 461 – General Rule for Taxable Year of Deduction