Casualty - How catastrophic?

[Snaggletooth]

Where do we draw the line before declaring a "casualty?" Let me give a couple of examples.

A farmer has 40 head of cattle. One of them dies from being too close to an electric fence when lightning strikes. If we regard this as a "casualty", then the 4797 instructions require us to separate the loss as a non-business item. Problem is -- farmers with 40 head of breeding cattle will lose at least 1 cow every year to death, and quite often from abnormal causes. This is so commonplace that I would hesitate to call the death of one cow a "casualty."

Same farmer loses 20 head (half his herd) to wranglers before finding out the deputy sheriff has been pulling up in his trailer and stealing them. THAT is a casualty I suppose.

Next example: Convenience store turns $2MM a year in revenue. Unexplained losses of gasoline and inventory suggests that there have been customers shoplifting and people driving off without paying for gas. Owner estimates he's lost $5K annually from this. He can't really file a police report with no more information than this, and it would be a waste of time if he did. Is THIS a casualty? How many of us would separate this instead of letting it fall out in Cost of Goods Sold?

Is there a definitive answer? Is it a "facts and circumstances" topic so affectionately portrayed so often by our friend Armando Booleyboo? I know the public accounting treatment of casualties requires a catastrophe for a loss to be considered "extraordinary." Certainly none of the above examples would qualify under GAAP. Tax law is not the same, and I wonder if any of the readers has IRS audit experience with this issue??

[S T]

Convenience Store

Snags,

Curious,

Next example: Convenience store turns $2MM a year in revenue. Unexplained losses of gasoline and inventory suggests that there have been customers shoplifting and people driving off without paying for gas. Owner estimates he's lost $5K annually from this. He can't really file a police report with no more information than this, and it would be a waste of time if he did. Is THIS a casualty? How many of us would separate this instead of letting it fall out in Cost of Goods Sold?

Not just customers, sometimes or a lot of the time employees. I think most always it is reflected in the COG, so how would you report it in the Accounting(what accounts would you DR and CR) and then subsequently on the Tax Return. Isn't it better under the COG as it will lower SE tax?

Sandy

[Snaggletooth]

Obviously Better

Yes it is obviously advantageous to report theft in COS. Just let it "fall out" instead of isolating it as a casualty loss. Ironically, the GAAP treatment is identical to the Part A of Schedule C where COS is calculated.

Isolating theft as a casualty loss means COS is less and SE tax is more. Also the 10% threshold and $100 have to be met on EVERY OCCURRENCE which seems ridiculous in the case of a convenience store.

Also store owners seem to be focused on thefts of tiny amounts of money. Gross mismanagement can cost a $2MM store tens of thousands of dollars, also personal aggrandizement such as purchasing Cadillacs and houseboats while the store is barely making money. But all the owner wants to talk about is the $30 stolen by an employee.

Also "drive offs" are causing this same guy to go broke. (People who pump gas and drive away without paying). "Pete, how many of these drive offs have you had?" "Had a couple already this year...."