165(i) allows early disaster loss claims, creating COVID-19 cash opportunities

4/29/2020

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.

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.

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.

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.

Patrick Duffany, JD, CPA, Managing Partner, Tax

959.200.7270

Brian Newman, CPA, Partner, Practice Leader, Federal Tax Services

959.200.7009

Travis Butler, CPA, Director, National Tax

312.508.5821

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