When an unexpected wildfire blazes through a property, it generally leaves behind the charred ashes of grass, trees, fences and possibly buildings. Landowners will immediately think of the loss in value the wildfire has created, but, in the eyes of the Internal Revenue Service, is there a deductible loss?
For purposes of this article, we are only going to discuss the deductibility of a loss of for-profit business property. There are other rules and guidelines for personal and non-business property.
A casualty loss is allowed when the damage is of a physical nature resulting from accident, fire, storm, shipwreck, flood or other sudden destructive force. Damage from a wildfire definitely qualifies as a sudden destructive force. However, the first thing to remember in determining if there is a deductible loss is that a basis or unrecovered cost must exist for the item. In the case of grass, it is unlikely it has a basis. If it was weed-sprayed or fertilized, these expenses would have been deducted as ordinary business expenses – therefore, no basis left in the grass and no deductible loss. A unique situation may be where land was purchased recently and the purchase price was allocated between the land and the grass. For example, the transaction price was $800 per acre – $750 was allocated to land while $50 went to the grass. In this situation, the grass would have a basis of $50 per acre, allowing this amount to be deducted as a casualty loss. This will be a rare situation. With timber and fruit or nut orchards that have a basis or unrecovered cost, it is likely that, in the case of fire damage, there will be a deductible loss. Also, with fences, corrals and barns, it is likely they will have a basis and, therefore, a deductible loss if the item(s) have not been fully depreciated. The amount of a loss is determined by the difference in the value of the property immediately before and immediately after the casualty but cannot be in excess of the basis of the property. The amount should be supported by an appraisal made by a qualified appraiser. The appraisal fees are deductible. The casualty loss must be reduced by insurance or other compensation received.
If a landowner is required to file his or her income tax return as a farmer, meaning two-thirds of their gross income is from farming, the return is due March 1 (or April 15, if an estimate was filed by Jan. 15 and the estimated tax paid). Therefore, time is short unless an extension of time is filed. Contact your tax preparer soon to receive advice specific to your individual situation.
If a farmer does not have a deductible loss, is there any relief or help available through other government agencies? The answer is yes. There are programs the federal government has in place for special emergency situations when assistance is needed quickly. Other assistance may be made available later as Congress has time to make the necessary assessments and appropriate funding. A couple of the programs currently available from your county Farm Service Agency are Direct Emergency loans at low interest rates of 3.75 percent. Each county has varying amounts of loan funds available, but most counties have some money set aside for emergencies such as wildfires. However, qualifications other than having a wildfire must be met for a farmer to receive one of these loans. Another program currently available through the county Farm Service Agency is the Emergency Conservation Program. This is a cost-share program specifically to restore or replace damaged fences. A farmer must have a minimum of $1,000 of damage or loss to qualify. If qualified, the program will pay 75 percent of the costs up to a certain level to replace a fence and a lesser amount to restore a fence. Each county has the flexibility to establish the maximum amount per foot they will provide in cost-share funds. Therefore, each producer will need to check with their local county FSA office to determine exact amounts. The amount will generally decrease as the age of the fence increases up to 30 years. No cost-share money is available to replace or restore fences over 30 years old.
There are other programs being considered and approved almost daily. The Texas Natural Resources Conservation Service (NRCS) is considering a cost-share payment of up to $10 per acre for a deferred grazing period in counties affected by wildfires. Recently, the Texas state NRCS office announced that emergency haying and grazing of Conservation Reserve Program (CRP) land is approved for every county in Texas. Emergency haying is authorized until May 1, and emergency grazing is authorized until June 1. Farmers and ranchers may need to modify their conservation plans at their respective county NRCS office if they plan to use CRP land for haying or grazing. Periodically, more counties are added to the list of Presidentially Declared Disaster Areas. Time will tell what benefits will accrue to these areas. Most common is that due dates of tax returns are extended without any penalties. At times, low-interest loans are available to help producers with losses. Possibly, direct assistance will be available to help defray extra feed and hay expenses due to extreme drought conditions. However, this assistance, if approved, will come down the road. It would be a good idea to keep records of your current livestock numbers by class and receipts of feed, hay and fertilizer purchases.
Visit your tax preparer soon, and stay in close contact with the USDA offices in your county for the latest developments in available assistance.