Accelerating Disaster Losses Can Provide Immediate Tax Relief for Businesses  

Businesses affected by the COVID-19 pandemic can choose to accelerate to 2019, deductions for certain lost assets or inventory instead of waiting to claim those losses on their 2020 tax return.

Under Section 165(i) of the Internal Revenue Code, a taxpayer can elect to claim a qualified disaster loss in the tax year immediately preceding the year in which the loss was actually sustained. In the case of the COVID-19 pandemic, this presents an opportunity for businesses to access much needed cash through immediate tax savings.

Accelerating losses to 2019 also has the potential to create net operating losses (NOLs) that the taxpayer could carry back to earlier taxable years, based on new NOL rules under the CARES Act.

What types of disaster losses can be accelerated?

The following are a few examples of the types of losses that could potentially be claimed in 2020, but may be accelerated to 2019 under IRC Section 165(i):

• Disposal of inventory that has become unsaleable (e.g., restaurants disposing of food)
• Permanent closure of stores and/or locations (e.g., costs associated with disposing of inventory or equipment)
• Complete abandonment of fixed assets (e.g., leasehold improvements or equipment disposal)
• Costs related to abandoning pending transactions or canceling contracts, licenses or leases
• Worthless securities (Note: subject to appropriate rules)
• Prepayment of events (e.g., non-refunded conference fees)

Should your business accelerate disaster losses?

If you have not yet filed your 2019 return, you may want to take advantage of this opportunity to accelerate qualifying disaster-related losses.

Taxpayers who have already filed have the ability to amend their 2019 federal income tax return. However, it may not make sense to amend a filed return at this point unless the deduction would have a significant financial impact.

Corporations who determine, as a result of this election, that they may have overpaid their 2019 taxes, can request a “quick refund” by filing Form 4466.

Questions about accelerating disaster losses? Contact your Kaufman Rossin tax professional to learn more about Section 165(i) and how it may benefit your business.