Theft losses

A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent. The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero. For tax years 2018 through 2025, individual taxpayers with theft losses are allowed a deduction if the loss is due to theft related to a transaction entered into for profit.

Fraud is theft, and if it ocurred with your clients S-Corp it would be deductable. Be sure to keep good records to support the loss. Research pub 584-B, and instructions for form 4684 section B.