Thieving Thoughts

Recently I’ve worked with a number of clients who were the victims of employee theft.  While I like to emphasize prevention, this is so commonplace that it’s also worth visiting what to do if (when?) it happens to you.   Employee fraud is a huge problem, and in difficult economic times it’s not on the decline. In retailing alone, employee theft accounts for almost 44% of total losses.  That’s about 10% less than what stores lose to shoplifting.  Guess which one is easier to do?

Loss of property to theft is generally tax deductible.  As with everything else involving taxes, you have to be prepared in case the deduction is challenged.  For a theft loss to be deducted the event that caused you to lose property or money has to be illegal in your state.  A conviction is not required. The IRS is pretty broad in its definition of theft including:  blackmail, embezzlement, extortion, kidnapping and fraud on their list.  Employee fraud and theft usually qualifies.

In a rare show of common sense, you can deduct the theft loss in the year it is discovered, which doesn’t have to be the year in which it occurred.  However, you have to be prepared to prove that the property was yours, when you discovered it was lost, and that you didn’t just lose track of whatever went missing.  Also, if you are eligible for an insurance claim, or have some other possible means of recovery you need to do that first.  You can’t deduct the loss until it’s completely clear how much you have lost and that it’s permanent.

Other things to keep in mind are that inventory loss can be managed on your tax return by either raising the cost of goods sold or reducing the value of your inventory.  You don’t need to file a special form for either method.  Also, if you lose money on a stock due to accounting fraud or other malfeasance on the part of that company, that’s considered a capital loss instead of a theft loss.  Finally, if you’re the victim of a Ponzi scheme, your ability to deduct the loss is constrained by whether the transaction was part of your trade of business (in that case you’re fine) or a personal loss (this is worse).  If it's personal, you won’t get everything back, and you’ll probably want to hire an accountant to figure out how to calculate the deduction.

On that cheery note I’ll go back to tracking the Frankenstorm headed our way. Hopefully my next topic won’t be about deducting casualty losses.