Authored by Joseph Perera
On March 13, 2020, President Trump declared the COVID-19 pandemic as a federal disaster under section 501 (b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
The COVID-19 pandemic has significantly affected the nationwide economy, and many individuals and businesses have incurred losses due to the pandemic. Those individuals and companies that have sustained losses in 2020 as a result of the pandemic may be able to claim those losses on their 2019 tax returns.
Section 165(i) of the Internal Revenue Code allows taxpayers that sustain disaster losses in one year to make an election to accelerate that loss and deduct it in the prior year. A disaster loss is a loss that occurs in a disaster area and is attributable to a federal disaster (i.e., a disaster subsequently determined by the president to warrant assistance by the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act).
Additionally, the loss (1) must be incurred in a trade or business or incurred in a transaction entered into for profit (i.e., an investment activity) (2) involve tangible or intangible property for which the taxpayer has basis, and (3) arise from a closed and completed transaction fixed by identifiable events. The amount of the loss is reduced by any insurance proceeds that the taxpayer receives as reimbursement for its loss and the loss cannot exceed the taxpayer’s tax basis in the damaged property.
Some examples of losses that may qualify for this provision include impaired inventory, abandoned leasehold improvements and equipment, costs associated with permanently closing a business (e.g., disposition costs for inventory and other fixed assets and equipment), and capitalized costs related to abandoned business transactions.
Losses that do not qualify include lost profits or revenue and declines in the fair market value of assets and property due to depressed economic conditions related to COVID-19.
Businesses and individuals that have sustained business or investment losses as a result of the COVID-19 pandemic may want to consider talking to their tax and financial advisors to model out scenarios to determine whether it is advantageous to claim losses sustained in 2020 on their 2019 tax return.