IRS Material: Casualty (Business)
Pub 547
Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. A sudden event is one that is swift, not gradual or progressive. An unexpected event is one that is ordinarily unanticipated and unintended. An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. A casualty can also include a government-ordered demolition or relocation of a home that is unsafe to use because of a disaster. See Disaster Area Losses, later. Casualty losses can result from a number of different causes, including: Earthquakes Hurricanes Tornadoes Floods Storms Volcanic eruptions Shipwrecks Mine cave-ins Sonic booms Vandalism Fires. If you willfully set the fire, or pay someone else to set it, you cannot deduct the resulting loss. Car accidents. The loss from an accident to your car is not a casualty loss if your willful negligence or willful act caused the accident. The same is true if the willful act or willful negligence of someone acting for you caused the accident. Other accidents. A loss due to accidental breakage of china or glassware under normal conditions is not a casualty loss. Neither is a loss due to damage done by a family pet. Nondeductible losses. There is no casualty loss deduction if the damage or destruction is caused by: Termites or moths Disease, insects, etc. The progressive damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests is not a deductible casualty loss. But a sudden destruction due to an unexpected or unusual infestation by beetles or other insects may result in a casualty loss. If a storm, flood, or fire damages trees and shrubs, the loss is a casualty. Progressive deterioration. If a steadily operating cause or a normal process damages your property, it is not considered a casualty. For example, the steady weakening of a building due to normal wind and weather conditions is not a casualty. But, the rust and water damage to rugs and drapes caused by the bursting of a water heater qualifies as a casualty. The deterioration and damage to the water heater itself does not qualify. Drought. In most cases, when drought causes damage or loss through progressive deterioration, it is not a casualty loss. To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit.