In the midst of the uncertainty and instability that the COVID-19 pandemic has created for businesses and individuals, some relief is available for taxpayers in the form of deductible losses thanks to the preexisting Internal Revenue Code (IRC) Section 165(i). While the CARES Act and FFCRA have received much of the attention, taxpayers may also find relief thanks to Section 165(i) which allows for losses sustained as a result of the pandemic in 2020 to be claimed on the taxpayer’s 2019 tax return.
This deduction is triggered by a federally declared disaster, like the pandemic which was declared a national emergency on March 13, 2020. In the case of this deduction, losses attributed to federally declared disasters can be deducted on the previous year’s return. While not often used, this deduction comes at the right time for businesses struggling during the pandemic.
In order to claim the Section 165(i) deduction, losses must:
- Be attributable to a federally declared disaster
- Occur in a disaster area
- Not be compensated by insurance or otherwise
While some taxpayers will fit into this deduction, the rules and procedures are complex.
Examples of deductible losses as a result of COVID-19 vary from costs related to running your business during a pandemic like investments in personal protective equipment and cleaning supplies and services, to the closure of stores and facilities and disposal of unsaleable inventory. Other eligible costs include certain termination payments, losses from property sales or exchanges, abandonment of leasehold improvements, and nonrefundable event payments, to name a few.
To make the Section 165(i) election, taxpayers must include Form 4684, “Casualties and Thefts,” with their return within six months from the due date for filing the taxpayer’s federal income tax return for the disaster year.
We can assist you with identifying your deductible expenses and following the complex rules and procedures for making this election. Reach out for assistance.