How to Turn 2020 Losses into 2019 Deductions

June 25, 2020

Congress and the Department of Treasury’s responses to the COVID-19 pandemic have provided corporate and individual taxpayers with a myriad of short- and long-term tax breaks. While public attention has been seized by the $2 trillion CARES Act and $190 billion FFCRA, there is an existing tax provision that permits taxpayers to claim otherwise deductible losses sustained in 2020 on their 2019 tax returns if the losses are attributable to the pandemic.

Internal Revenue Code (IRC) Section 165(i) allows taxpayers to elect to deduct a loss attributable to a federally declared disaster in the preceding tax year. On March 13, 2020, President Trump declared a national emergency with respect to COVID-19 (deeming January 20, 2020 the start of the disaster with an end date undeclared). As a result, Section 165(i) was triggered and effectively became applicable to taxpayers’ current year tax filings. What constitutes as a loss attributable to a disaster, thus qualifying for coverage under Section 165(i), depends on each taxpayer’s circumstances.

To elect to deduct a disaster loss in the preceding year under Section 165(i), a taxpayer must establish that the loss:

  • is attributable to a federally declared disaster,
  • occurred in the disaster area, and
  • is not compensated by insurance or otherwise.

Examples of COVID-19 Losses and Expenses

Examples of deductible losses and/or unanticipated expenses attributable to COVID-19 that could be accelerated to 2019 tax returns under Section 165(i) include, but are not limited to the following:

  • Costs of medical personal protective equipment (PPE)
  • Closure of stores and facility locations
  • Complete abandonment of leasehold improvements
  • Permanent retirement of fixed assets
  • Disposal of unsaleable inventory, supplies and other property
  • Losses from the sale or exchange of property
  • Losses on mark-to-market securities
  • Impaired or worthless securities (not bad debts)
  • Certain professional expenses (i.e. – representation of force majeure clauses in contracts)
  • Certain termination payments to cancel contracts, licenses or leases
  • Abandonment of pending business transactions for which costs have been capitalized
  • Prepayment of events, conferences, etc. where refunds or credits are not provided

Procedure for Making the Election

To make the election for the preceding year on either an original federal income tax return or an amended federal income tax return, taxpayers will need to attach Form 4684, “Casualties and Thefts,” to their return. The due date for making the Section 165(i) election is six months after the due date for filing the taxpayer’s federal income tax return for the disaster year, determined without regard to any extension of time to file.

The Section 165(i) election is intended to provide taxpayers with additional relief. However, the rules and procedures for making the Section 165(i) election are complex and unique to each taxpayer. Aprio’s Tax team is prepared to provide analysis and further guidance. Reach out today.

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About the Author

Justin Elanjian

Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.