Can I claim deposit to subcontractor that didn't complete work as an expense? Rental destroyed in Fed dec disaster 2020. Sub con took 50% deposit then closed business?

[ronjd670-gmail-c]

Single family home -rental destroyed in9/2020 In July 2021 we hired a cabinet company, signing an agreement for fab and install  of cabinets and made a 50% deposit (5 figures). Two weeks later we were notified he was closing business. Promptly shuttered the business, departed his residence, and fled the state. We were unable to locate to serve him for a civil case. Unable to recover funds and incurred fees filing court case and for process server. Rental rebuild will be in May 2022. Filed 1033 to defer recognizing insurance proceeds.

[DianeW777 · Accepted solution]

This would be considered a casualty which is fraud. This is reported on Form 4684 and then deducted on your return.  

• Instructions Form 4684: If Form 4797, Sales of Business Property, isn't otherwise required, enter the amount from this line on your Schedule 1 (Form 1040), line 4. Next to that line, enter “Form 4684.

First you must reduce the loss by any insurance reimbursement if applicable.  Also reduce it for any products you did receive such as cabinets. Next, as you have already outlined you need to take all the steps necessary to try to recover your money.  Keep all of those records with your tax return should you need them later.

TurboTax will guide you through the process of reporting your loss. Be sure to select that it was an income producing property and that it was for a passive activity since it is for a rental. Below are some of the screen images you will see.  

• Search (upper right) > casualty loss > click the Jump to ... Link > begin to enter your loss

If any money is recovered in the future it will be taxable income in the year you receive it.

[ronjd670-gmail-c]

Additional question or clarification. What year can I take/recognize the loss.

- The rental will not be put into service until May 2022. I received loss of rent insurance payments, during reconstruction.

-The loss of deposit occurred in 2021 but the case was not heard and dismissed against the owner until May 2022.

-The court did make judgment against the now bankrupt Corp. which has no money.

-I'm in line with 10 or more other claims for token claim on a bond (maybe 10% of loss) may not be settled until 2023. 

[DianeW777]

You can take the loss for 2021, however as indicated, you must report any recovery as income in the year you receive it.