By Justin Tisdale on June 3
IRC Sec. 165 contains a timing provision that allows a taxpayer to elect to deduct a disaster loss in the preceding tax year. To be eligible, the disaster must be a federal disaster declared by the President of the United States. On March 13, 2020, President Trump declared a nationwide emergency pursuant to Sec. 501(b) of Stafford Act to avoid governors needing to request individual emergency declarations.
For the loss to be deducted, it must be evidenced by a closed and completed transaction, fixed by identifiable events, and realized during the tax year. Thus, an unrealized loss is not eligible. The loss is limited to the unreimbursed amount (net of any insurance reimbursements). The loss cannot exceed the taxpayer’s basis in the damaged property.
This provision provides taxpayers impacted by the COVID-19 with the ability improve cash-flow through accelerated tax deductions. The types of losses will vary so it’s recommended to get with your tax adviser to discuss your specific situation.