Disaster Losses from Coronavirus & the Election to Claim Losses in Preceding Tax Year
Articles by: Richey May, May 18, 2020
As a result of the Coronavirus pandemic, the President has declared every state as a disaster area eligible for federal assistance. This declaration also allows taxpayers to elect to claim disaster losses incurred during the 2020 pandemic on their tax return for the preceding tax year. For calendar year taxpayers, an election can be made to claim disaster losses incurred during the pandemic in 2020 on the taxpayer’s original or amended 2019 tax return. Taxpayers can claim the losses on an original or amended return for the prior year.
As a result of making this election, a reduction of 2019 taxable income and related federal and state tax liabilities is expected. In addition, 2020 estimated tax payments may be reduced if they are based on 2019 tax liabilities.
In order to claim disaster losses from Coronavirus, it must be a loss that is incurred as a result of the pandemic. It must also be a loss that is not compensated by insurance and a loss that is from a completed transaction such as a sale or other disposition of an asset. Losses of anticipated future income and changes in fair market value of an asset cannot be claimed as a disaster loss. Some examples of losses that may have occurred in a pandemic are:
- Closure of store or branch locations (e.g. – lease deposits, lease termination fees, abandoned depreciable property)
- Impaired securities (e.g. securities impairment because of the pandemic – including loans held for sale net of related closed hedging transactions – if already sold at a loss due to the pandemic)
- Disposal of inventory, supplies or other property at a loss caused by pandemic
- Incremental and unrecovered expenses incurred as a result of the pandemic, like additional Personal Protective Equipment (PPE), supplies, cleaning, or other pandemic attributable costs
While most federal disasters, such as hurricanes and tornadoes, typically damage physical property, many taxpayers may have incurred disaster losses from coronavirus that are also eligible for the election to deduct on the preceding year return.
Our tax professionals can work with you to help you determine if this provision may be applicable to your company and eligible to be claimed on your prior year return.