June 3, 2020
Internal Revenue Code (IRC) Section 165(i)
, allows a taxpayer who suffers a loss attributable to a disaster to claim a deduction for that loss. The taxpayer can claim the loss on their federal income tax return for the taxable year immediately preceding when the disaster occurred. Typically, the President of the United States declares a federal natural disaster such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption in a specific geographic area for the taxpayer to be eligible for this deduction. President Trump declared on March 13, 2020 an “federal emergency” under Sec. 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (“Stafford Act”). He also approved major disaster declaration requests under Sec. 401(a) of the Stafford Act for all 50 states, the District of Columbia and various U.S. territories. IRC Section 165(i) then became available to taxpayers who suffered a loss due to COVID-19.
The loss must be otherwise allowable as a deduction under IRC Section 165. Generally, this requires that there is a basis in tangible or intangible property and the loss is:
- Evidenced by closed and completed transactions
- Fixed by identifiable events
- Sustained during the year of the event
IRC Section 165 is typically applicable to all losses incurred in a trade or business and losses incurred in any transaction entered into for profit though not connected with a trade or business. The amount of the loss cannot exceed the amount not included in an insurance settlement or other type of reimbursement. The amount of the loss is determined based on the facts existing at the date the taxpayer claims the loss. An election under this subsection applies to the entire loss sustained from that disaster during the disaster year.
To claim a COVID-19 related disaster loss for the 2019 tax year, taxpayers must report the loss on either an original or amended 2019 federal tax return on
Form 4684: Casualty and Theft
. They will also have to attach a statement providing specific information set out in section
Section 3.02 of Revenue Procedure 2016-53
. The election statement must contain the following information:
- The name or a description of the disaster and date or dates of the disaster which gave rise to the loss.
- The address, including the city, town, county, parish, State, and zip code, where the damaged or destroyed property was located at the time of the disaster.
The taxpayer must maintain supporting documentation of the loss as resulting from the COVID-19 pandemic.
Examples of losses attributable to COVID-19 include:
- Abandonment of pending business deals for which costs have been capitalized
- Impaired & worthless securities (but not bad debts)
- Certain termination payments to cancel contracts, licenses or leases
- Closure of store and facility locations
- Complete abandonment of leasehold improvements
- Disposal of inventory, supplies, and other property that has become unsaleable
- Losses from the sale or exchange of property
- Losses on mark-to-market securities
- Permanent retirement of fixed assets
- Prepayment of events, conferences, etc. where refunds or credits are not provided.
Lost revenues and a decline in fair market value of property due to economic conditions related to COVID-19 do not qualify for consideration under IRC Section 165(i).
Upon making the election, the taxpayer is required to carryback all its IRC Section 165 losses attributable to COVID-19. If applicable, the taxpayer will not be able to claim a loss on outstanding insurance claims. Other rules apply.
Stay safe,
Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
