On March 13, 2020, the President made an emergency declaration
for the ongoing COVID-19 pandemic under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”) for all states, tribes, territories and the District of Columbia. This declaration triggered the disaster loss provisions of IRC section 165(i), which allows a taxpayer to elect to deduct certain losses in the taxable year immediately preceding the year in which the loss occurs.
Historically, IRC section 165(i) has been used by taxpayers in a specific geographical area that has been impacted by a hurricane or fire, however these accelerated loss deduction provisions are currently available to all U.S. taxpayers who suffer COVID-19-related losses. This means a calendar-year taxpayer can deduct COVID-19-related losses that occur in 2020 on their 2019 tax return.
Overview
A taxpayer can claim COVID-19-related disaster losses on an original or amended tax return using Form 4684 Casualties and Thefts. Revenue Procedure 2016-53 further requires a taxpayer to provide a general information statement that substantiates legitimate use of IRC section 165(i).
Although COVID-19-related losses are unlikely to include the physical damage that is usually associated with disaster losses, other types of losses may be claimed such as:
- Impaired securities;
- Abandoning deals for which costs have been capitalized; or
- Disposal of inventory, supplies, or other property that is no longer usable.
The amount of loss that is allowed is reduced by any amount that the taxpayer is compensated by insurance or otherwise.
Practical Considerations
- Corporations may file Form 4466 to receive a quick refund of overpayment of estimated tax. Note that the Form 4466 due date has not been extended, so the form is due by the original filing deadline (April 15 for calendar-year taxpayers).
- Taxpayer must maintain documentation sufficient to substantiate the loss and the amount of loss.
- If a taxpayer elects to use IRC section 165(i), deduction for all eligible disaster losses must be accelerated.
- States may or may not conform to these rules.
The rules and methods for claiming disaster losses are complex and nuanced. If you have any questions regarding IRC section 165(i) or its impact on you or your business, please contact the tax advisors at GHJ.