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We Hear You on Disaster Loss Uncertainty, IRS Says

Posted on June 18, 2020

The IRS is aware that taxpayers are in the dark on some aspects of a disaster loss provision that allows deductions on prior-year tax returns, and it is considering the issue.

That’s according to John Moriarty, IRS associate chief counsel (income tax & accounting), who said on a June 17 American Bar Association Section of Taxation webcast that the application of parts of the disaster loss provisions in section 165(i) has been unclear for a while, but the COVID-19 pandemic brought the issues to the forefront.

“We have met members of the ABA tax section on the issues around 165(i), and I understand the committee is working on written comments, which we hope to see soon,” Moriarty said. He added the IRS is aware that some taxpayers are considering taking aggressive positions under that provision, which has added to the importance of the government’s examination of the issue.

Casualty loss deductions are generally claimed in the year of the loss. However, losses in a federally declared disaster area may be deducted on the taxpayer’s prior-year return under section 165(i). The statute provides taxpayers that suffered a loss and need cash the opportunity to monetize those losses more quickly and reinvest in their business by reducing prior-year taxes.

President Trump’s declaration of the coronavirus crisis as a federal disaster that warrants government assistance under the Stafford Act put the spotlight on section 165(i).

One issue is that section 165(i) is typically used by capital-intensive businesses for damages from natural disasters like hurricanes or tornadoes. Those damages are normally more tangible than the losses companies are experiencing today, practitioners have pointed out.

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