165(i) allows early disaster loss claims, creating COVID-19 cash opportunities
Internal Revenue Code (IRC) Section 165(i) is a timing provision that allows a taxpayer to elect to claim a disaster loss in the tax year immediately preceding the year in which the loss was actually sustained. A disaster loss is a loss occurring in a disaster area and attributable to a federally declared disaster, defined per Treas. Reg. Section 1.165-11(b)(1) as any disaster subsequently determined by the president to warrant assistance by the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. On March 13, 2020, President Trump made this declaration in connection with the COVID-19 pandemic, paving the way for these early disaster loss claims.
How to claim the early disaster loss
In claiming a Section 165 disaster loss, the following rules apply:
- The loss must be deductible under Section 165(a), which generally requires basis in tangible or intangible property and a closed and completed transaction fixed by identifiable events;
- The loss is limited to the unreimbursed amount (with any insurance reimbursements reducing the amount of loss that can be deducted);
- The loss cannot exceed a taxpayer’s basis in the damaged property; and
- The loss must be incurred in a federally declared disaster area and must be attributable to said disaster.
Examples of losses subject to the Section 165(i) provision
While the types of losses that qualify for disaster loss treatment will vary, below is a partial list of losses that, provided they satisfy the above tests, may qualify for disaster loss treatment:
1. Inventory impairments
2. Abandoned fixed assets (e.g., leasehold improvements, equipment)
3. Permanent closure costs (e.g., costs associated with the disposition of inventory and/or fixed assets)
4. Worthless securities (subject to potential capital loss rules dependent on whether the security is a capital asset)
5. Fees relating to abandoned transactions
Examples of losses or costs that will likely not qualify for disaster loss treatment include, but are not limited to, lost revenues and/or decrease in value due to the economic hardships or other market forces related to COVID-19.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Coronavirus Resource Center
InsightProposed regulations released on 162(f) rules on deductibility and reporting of certain fines and penaltiesThe Treasury has proposed clarifications of definitions and other deductibility and reporting rules under IRC sections 162(f) and 6050X. Click to learn more.
InsightIRS liberalizes certain cafeteria plan rules in response to COVID-19, raises health FSA carryover amountDana FriedNotices 2020-29 and 2020-33 include new 2020 mid-year cafeteria plan election exceptions, extensions for using FSA funds, and a higher health FSA carryover limit.
Insight10 Questions: A practical tax perspective on the CARES Act, FFCRA, and other COVID-19 reliefRead answers to questions received for the CohnReznick webinar on tax aspects of the CARES Act, FFCRA, Employee Retention Credit, and other COVID-19 relief.
InsightExpenses paid with forgiven PPP loans are nondeductible, IRS saysTravis Butler, Michael BilletIRS Notice 2020-32 clarifies rules for payroll, rent, and other otherwise deductible expenses paid with coronavirus-relief Paycheck Protection Program loans.