If you suffer a theft in the course of your business or trade, you may be entitled to a tax deduction equal to your loss. The theft can be anything from embezzlement to robbery, as long the action is illegal and you report it as a crime. The lost property can be money, equipment, supplies or even items owned by an employee for use on the job.

Types of Thefts Covered

The Internal Revenue Service defines theft as any crime involving "the taking and removing of money or property with the intent to deprive the owner of it." The definition covers burglary, robbery, embezzlement, extortion and even blackmail. The taking of money through fraud or misrepresentation also counts as theft if the action violates state or local law. Filing a police report helps you document the theft in the event the IRS asks you to substantiate your deduction.

Calculating Loss (or Gain)

The amount of loss you can deduct on your tax return is usually equal to the fair market value of all the stolen property, minus any reimbursement you can claim from insurance coverage. If you claimed depreciation on any of the property in previous years, you can only count your adjusted basis in the property as its value. If your insurance pays you more than your adjusted basis, you have to pay income taxes on the gain unless you use the money to replace the stolen property within two years.

Forms to Use

You must calculate your total business theft losses using Form 4684, "Casualties and Thefts." If you are a business owner, you must report the total from Form 4684 on Line 14 of your Form 1040 as "Other gains (or losses)." If you are an employee and the stolen property was required for your job, you must report the total on Form 4684 on Line 28 of Schedule A as "Other miscellaneous deductions." You can only deduct the total as an employee if you itemize deductions.

Special Rules for Inventory

If the theft results in a loss of your inventory, such as items you hold for sale, you do not have to use Form 4684. You have the option of deducting the theft by increasing the cost of goods sold when you complete your Schedule C. Simply deduct the value of the stolen items from your closing inventory. This increases your total business expenses, resulting in the same deduction. If you take this route, you cannot take a deduction for those same items on Form 4684.