COVID-19 Losses May Be Deductible on 2019 Returns

On March 13, President Trump issued an emergency declaration under the Stafford Act and declared a national emergency due to the COVID-19 pandemic. As a result, under Code Sec. 165(i), certain taxpayers may be able to deduct disaster losses that are attributable to COVID-19 on their 2019 return, even though the pandemic is occurring in 2020.

A determination of whether a loss will qualify under Code Sec. 165(i) necessitates a thorough examination of the facts and circumstances, as well as any specific deductibility rules that may apply based on the type of expense. Although the pandemic meets the definition of a federally declared disaster, the IRS has not yet specifically ruled on the applicability of Code Sec. 165(i) to COVID-19.

Examples of losses that may qualify for the accelerated deduction opportunity include, but are not limited to, the following:

  • Inventory impairments
  • Worthless securities (but not bad debts);
  • Closure costs of store and facility locations;
  • Complete abandonment of leasehold improvements;
  • Permanent retirement of fixed assets;
  • Abandonment of pending business deals for costs otherwise capitalized;
  • Termination payments to cancel contracts, leases or licenses;
  • Prepaid events, travel, conference space, hotel rooms, etc. when taxpayer is not provided a refund or credit;
  • Prepaid raw materials or other items to fulfill a contract and the contract has been cancelled;
  • Mark-to-market securities; or
  • Losses from the sale or exchange of property.

Some losses generally would not qualify to be accelerated to 2019 under section 165. Examples include, but are not limited to:

  • Lost revenues
  • Goodwill losses, which are generally difficult to write off under section 165
  • A decline in fair market value of the property due to ’economic obsolescence‘ attributable to buyer resistance which attached to the property;
  • An appraisal reflecting a potential buyer resistance which represents speculative estimates of rental loss;

A taxpayer makes the election on an original federal tax return or an amended federal tax return filed on or before the date that is six months after the original due date for the disaster year (determined without regard to any extension of time to file). This means that for the 2019 calendar tax year a taxpayer could have until the Fall of 2021 to file an original or amended tax return to make this election. 

The taxpayer has the burden of proving the existence of the casualty as the cause of the section 165 loss.

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