How to account for stolen construction deposit funds

[ahmiller67]

We have a large construction project on a multi-family apartment building in process which spanned multiple years.  In the previous year taxes, I accounted for the costs to date as “Construction In Progress” as an asset on my balance sheet.  The contractor ended up stealing deposit money without completing most of the work.  Now I have an asset paid for on my books, but there is no asset in the real world.  How do I account for the missing funds the contractor stole?

Thanks,

-Andrew

[Mike9241]

what steps have you taken to recover amounts paid in excess of work performed? 

if the contractor was boned, did you file a claim against the bonding company?

have you filed suit in small claims court or if above small claims for your state or have you engaged an attorney to file suit against the contractor?

in short, to sustain a loss for income tax purposes, the IRS, if it inquires, will want to know what steps you've taken to recover the losses.  if you don't do enough the iRS can deny the deduction for any loss. until such ytime as recovery seems unlikely all you have is a contingent loss which is not deductible. 

an example of this: you have auto insurance and are in an accident where your insurance company will be paying. However, rather than file a claim with them you decide not to file a claim. The IRS will not allow you to write off your loss in excess of any deductible if it's a business loss.  

[ahmiller67]

We initially sent a demand letter from an attorney, but the contractor ignored it.  We ended up going through a mediation with the State's construction contractor board and he agreed to return approximately 40% of what we had paid him.  He is on a payment schedule and we are supposed to receive the funds over the next 6 months.

Thanks,

-Andrew

[ahmiller67]

Do you have any additional advice based on my feedback?

[Mike9241]

you might have a business casualty loss which would be reported using form 4684 for the return for the entity that lost the funds.  Since all the facts in the case and what happened that only 40% was to be returned are crucial in determining if you have a deductible loss. I highly recommend you consult with a tax pro that can go through everything and give advice on taking a loss