More business casualty questions. This is making me nuts!

[NECPA in NEBRASKA]

I really want to get this return filed as soon as possible, but I am still getting information.My client is in a federally declared disaster area and has damage to 2 business buildings that occurred in 2014. They received partial insurance payments in 2014 and 2015 and will receive more in 2016. The repairs will not be finished until 2017, due to most of the town having been damaged. They have no appraisals to show FMV before or after the damage, so I was going to use the cost to repair to determine gain or loss. IRS rules say that to use the cost of repairs method to determine the decrease in FMV of a property, the repairs must have been made by the due date of the tax return. After the repairs are made, they may file an amended return. I do have the  summary of replacement cost claim for 2014, but the IRS says that is not enough to file. This is for an S Corp that leases the buildings and is responsible for the repairs. Does anyone have any experience in dealing with a loss that covers so much time? I hate to have to go back and amend the S Corp and personal returns after so much time. Do I just ignore the insurance proceeds on the 2014 return and deal with it all later?

Thanks to anyone that can help to get this off of my desk!

[NECPA in NEBRASKA]

I have spent hours reading Pub 547, Tax Book and checking out other posts on three websites. Apparently, the only thing that we can do is hope that they can get the repairs finished in 2016 or it will be too late to amend. I talked to my client today and he talked to an appraiser that said it will take $5,000 to do the commercial appraisals for both buildings and that since it's over a year later, he doesn't know how accurate it would be. The repair rules certainly don't take real life into consideration sometimes. There is only so much work that can be finished on their timeline when there is so much widespread damage. The emergency repairs were fixed first to get back into business and then they started fixing the rest. They will still be getting insurance proceeds into 2017. 

So if I'm not reporting the casualty in 2014, do I just ignore the proceeds? I think that I can since it was in a federally declared disaster area and I don't know if there is a gain or loss, since it's not finished.

 

[SaraEA]

Look at pages 12-13 of the pub.  Under when to report gains or losses, there are various scenarios but all say to deduct a loss or declare a gain when the amount is determinable, i.e., reimbursed.  You can safely ignore the insurance proceeds at this point in time.  I think you are letting the disaster area designation confuse you--that allows people to deduct losses in a prior year so they get some money to rebuild sooner.  You don't know if you have a gain or loss, so wait until you do.

I had a case where a 20+ unit (retail and residential) building burned to the ground.  The insurance paid some but didn't want to honor the replacement cost part of the policy (that the clients had paid for for 40+ years).  The parties went back and forth for over two years until they finally settled.  This was the partnership's only asset, which was now gone, but I had to keep the entity open for 3 tax years until they got their final insurance payment.  It was a huge gain too, and the partners found it on their K-1s three years after they essentially went out of business.

[NECPA in NEBRASKA]

Thank you, Sara. That would be a huge ouch for your clients. I worry that this could happen to mine, too. Maybe I'll win the Powerball and be enjoying myself somewhere nice when it's finally finished and someone else can deal with the headache.