If your winery, vineyard or residence experienced damage, destruction or the loss of property as a result of the quake, you could claim it as a tax-deductible casualty loss.
On September 11, 2014, following urging from Governor Brown and local officials after Napa’s August earthquake, President Obama issued a disaster declaration for the state of California, releasing several federal aid measures and a few key federal (on top of existing state) tax relief provisions that could help winery and vineyard owners recover. Let’s take a look at the assistance now available.Casualty loss deduction
If your winery, vineyard or residence experienced damage, destruction or the loss of property as a result of the quake, you could claim it as a tax-deductible casualty loss. Doing so could provide immediate cash to help in your recovery process, but there are some limits.
As a result of the federal disaster status, a casualty loss deduction related to the quake can be claimed in either 2014 or 2013.The amount of the deduction equals the lesser of the adjusted basis of the property before the casualty or the decrease in fair market value of the property as a result of the casualty. The loss must be reduced by any salvage value and by insurance or other reimbursement you received or expect to receive. If a business or income-producing property is completely destroyed, the loss is generally equal to the adjusted basis of the property or its cost basis less accumulated depreciation.If the property is covered by insurance, you must file an insurance claim. If you fail to do so, the casualty loss deduction isn’t allowed. If the insurance reimbursement exceeds the casualty amount, the gain is taxable unless the reimbursement is reinvested in a similar-use property. The planning and preparation surrounding what qualifies as a similar-use property is very important to accomplish the desired tax deferral.
Reinvestment must be made within two years after the close of the first tax year in which any part of the gain is realized, though the IRS will sometimes grant extensions. For a primary residence (or its contents) located in a federally declared disaster area, the replacement period is instead four years. In the case where a taxpayer invests in replacement property, any resulting tax is deferred until the replacement property is sold.
It’s important to keep in mind that if a casualty loss is deducted in one year based on an expected insurance reimbursement and the actual reimbursement in a following year turns out to be more or less than expected, an adjustment may be required.
Repairs
Under the IRS’ final tangible property regulations, the cost of repairing damaged property generally must be capitalized if the taxpayer has properly adjusted the basis of the property as a result of the loss.
Extended tax deadlines
Taxpayers affected by a federally declared disaster are often eligible for extended deadlines for filing and paying taxes. Extended deadlines may also be provided to taxpayers for making contributions to an IRA as well as to employers for making deductible contributions to qualified defined benefit and contribution plans.
Property tax relief
Home and business property owners in Napa County could qualify for a temporary reduction in assessed value if earthquake-related damage exceeds $10,000. Reassessment could mean a lower property tax bill for the period between damage and repair or rebuilding.
Section 170 of the California Revenue and Taxation Code requires the Application for Reassessment of Property Damaged by Misfortune or Calamity form to be submitted within one year of the date of damage or within 60 calendar days of the sending of the application by the assessor’s office. Photographs and any other documentation, such as repair estimates, should accompany the form.
Also, since the governor has proclaimed Napa County to be in a state of emergency, owners of real property and manufactured homes may be eligible under Revenue and Taxation Code Section 194.1 to delay payment of the December 10, 2014, property tax installment without penalty. If all the conditions for property tax deferral are met, and a property tax deferral claim is filed on time, the payment will be due and delinquent 30 days after a corrected tax bill is issued.
You can obtain additional information by calling the Napa County Assessor’s Office at (707) 253-4459. In addition, owners of property damaged in the earthquake can visit the Napa Local Assistance Center at 301 First Street in Napa (www.napaquakeinfo.com). The center, which is open Monday through Friday from 8:00 a.m. to 4:00 p.m. and Saturday from 10:00 a.m. to 4:00 p.m., can provide information on available services for the earthquake recovery process.
Michael Ricioli is wine tax partner and Renée Bartlett is state and local tax senior manager at Moss Adams LLP. For questions about how your winery or vineyard can gain some financial relief from the damage caused by the Napa earthquake or for help applying for tax deductions or deferrals, contact your local Moss Adams adviser.
