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.
What Does CohnReznick Think?This provision provides taxpayers impacted by COVID-19 with the ability to potentially access cash taxes faster through accelerated deductions. Similarly, quick refunds could be available of overpaid estimated taxes for the current year. In addition, accelerating disaster losses could create net operating losses (NOLs) that could be carried back to earlier taxable years based on the new carryback rules outlined in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Taxpayers should consult their tax advisors to review their facts and determine the best course of action.
Subject matter expertise
CPA, Partner, Practice Leader, Federal Tax Services
CPA, JD, Managing Partner - Tax
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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 legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. 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 partners, 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.