November 12, 2024
Tax

Casualty Loss Deductions Need Fairer Approach


It may be time to reconsider how the tax code can best assist homeowners who suffer catastrophic losses, as hurricanes and other natural disasters are becoming more frequent and severe.

The current system for casualty loss deductions is outdated and inequitable, given escalating property values and the fluctuating costs of rebuilding.

Casualty losses are deductible only if they are attributable to a federally declared disaster. This means that property damaged or destroyed by other events can’t be claimed as a casualty loss deduction, though this limitation is set to expire in 2025.

But the most impactful qualification is that complete casualty loss deductions are limited to the lesser of the cost basis of the property or the decrease in the property’s fair market value as a result of the disaster. A homeowner’s basis in their home usually is the original price paid for the home plus any additions.

This policy is problematic, as it values a home by what the homeowner originally paid for it—not its current worth or the cost to buy or build equivalent housing. When a homeowner has remained in the same residence for many years, the original price may be wildly different from the home’s fair market value.

A fairer approach would be to cap casualty loss deductions using the assessed property value rather than the cost basis. This likely would still result in a shortfall for many homeowners seeking to purchase an equivalent home, but it would be more equitable than the cost basis model. Assessed values are used for property tax purposes and reflect the home’s current value more accurately than a possibly decades-old purchase price.

The tax code can’t do much in the near term to reduce natural disasters, but shifting to a casualty loss deduction based on assessed property value would provide a more equitable solution for homeowners seeking financial relief in the wake of catastrophic events.

—Andrew Leahey

Welcome to the Week in Insights for Bloomberg Tax’s latest analysis and news commentary. This week, experts analyzed Loper Bright’s impact on the 3M transfer pricing dispute, factors to consider before suing the IRS over unpaid ERC claims, and more.

The Exchange—It’s where great ideas on tax and accounting intersect.

—Curated by Daniel Xu

Insights

Covington & Burling’s Lauren Ann Ross and Adam Spiegel say post-Chevron questions spur ambiguity, as evidenced by 3M’s transfer pricing dispute—including where tax code Section 482 determines discretionary authority.

KPMG’s Thomas Herr says AI could help the IRS close a tax gap, noting that transfer pricing data has more nontraditional financial information than other areas of tax.

Pippa Browde of the University of Montana School of Law examines the broader scope of tax-exempt entity types owned by Indian tribal governments, saying the rules don’t factor in certain tribal enterprise structures.

NASBA president and CEO Daniel Dustin explains a proposal created with the AICPA, saying a “competency-based experience pathway” addresses challenges that aspiring CPAs face.

Fox Rothschild’s Matthew Lee, Brian Bernhardt, and Jonathan Wasser say businesses mulling lawsuits against the IRS for unpaid employee retention credit claims should evaluate their qualification method, claim size, and access to capital.

Cannabis accounting experts Rachel Wright and Simon Menkes say record-keeping will be crucial as Pennsylvania estimates millions in deductions for cannabis businesses over the next two years.

Aliant’s Jacob Stein looks at a California retirement law taking effect in 2025, saying concerned parties should consult a lawyer on asset protections.

Columnist Corner

Technically Speaking design by Jonathan Hurtarte/Bloomberg Tax

Congress should promote sales tax uniformity by motivating states to standardize their policies rather than by imposing a one-size-fits-all solution, Andrew Leahey says in his latest Technically Speaking column.

States that modernize their sales tax systems and collaborate on policy could receive grants and get “more flexibility in administering federal tax credits and other federal programs as trusted compliance partners,” Andrew writes. Read More

Corporate Tax Leaders Weigh AI’s Risk-Reward Calculus (Podcast)

Artificial intelligence is becoming a bigger part of tax practice and policy every day. The Big Four are spending billions of dollars on AI models, and even mid-tier accounting firms seem willing to at least tread into generative AI transformation, albeit slowly.

These investments raise questions about how corporate in-house tax departments are evaluating AI integration. In this special edition of Talking Tax, Bloomberg Tax Insights editor-at-large Rebecca Baker chatted with three different in-house tax leaders to hear their views on the emergence of AI in the profession—and in their lives.

News Roundup

Coca-Cola Appeals $2.6 Billion Transfer Pricing Tax Ruling

Coca-Cola Co. is appealing a US Tax Court decision on a transfer pricing dispute related to its Brazilian affiliate companies that could cost it $2.6 billion in taxes and billions more in interest. Read More

IRS Boosts Taxpayer Standard Deductions, Other Credits for 2025

The IRS announced its annual inflation adjustments for tax year 2025, setting marginal rates and bumping up standard deductions, earned income tax credits, alternative minimum tax exemption amounts, and others. Read More

Australia Lawmakers Recommend Tax on Big Tech to Support Media

An Australian Parliamentary panel recommended the country’s government consider enacting a digital platform levy on Big Tech companies such as Meta Platforms Inc. and Google to support media outlets. Read More

House Democrats Renew Effort Against Puerto Rico Tax Break

Three US House members are renewing a call to end a decade-old program offering substantial tax breaks to wealthy investors who relocate to Puerto Rico, introducing a congressional resolution to “swiftly address” what they called millions in lost revenue. Read More

Tax Management International Journal

As global capability centers grow in India, navigating through the right setup strategy (direct ownership or Built Operate Transfer) and understanding Indian tax implications is crucial for an MNE’s business structuring and predictability, say Khaitan & Co.’s Vinita Krishnan and Bharat Jain.

Although over 100 countries have signed the Multilateral Instrument, courts around the world have diverged in their application of the principal purpose test, says Christos A. Theophilou of STI Taxand.

Tax Management Memorandum

Dive into the new IRS regulations affecting retirement plan participants and beneficiaries with Kathryn J. Kennedy, former professor of law at the University of Illinois, for this second part of a two-part article series.

Career Moves

James Stewart joined Charles Russell Speechlys as a partner in its corporate tax and incentives team in London.

James Saeli joined Winston & Strawn as a partner in its transactions department and member of its tax practice in New York.

Brian Organ joined Nixon Peabody as partner in its project finance and public finance practice in San Francisco.

Joshua Ehrenfeld and Charles Curley joined Foley & Lardner as partners in its innovative technology sector and transactions practice group in Jacksonville, Fla.

If you’re changing jobs or being promoted, send your submission to TaxMoves@bloombergindustry.com for consideration.



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