On March 13, 2020, President Trump declared a national emergency disaster, related to the COVID-19 virus 1. Following the declaration, under the new tax law (TJCA), taxpayers can claim a business casualty loss related to the disaster on either their 2019 original/amended return or their 2020 return.
Some examples of losses that may qualify, but are not limited to the following:
- Inventory impairment such as food spoilage for restaurants who had to shut down
- Losses from deposits and costs of prepaid events that were canceled
- Abandonment of leasehold improvements and other fixed assets such as equipment and costs associated with permanent store closures
- Payments made to terminate contracts or leases
It should be noted that an overall loss of revenue or an increase in normal operating expenses do not qualify as part of the disaster loss.
Specific reporting and proper elections need to be made in order to qualify for the deduction. Pursuant to Rev. Proc 2016-53 2, an election must be made on either an original or amended return for the preceding year, in this case, 2019. The due date for making the election is six months after the due date for filing the return for the disaster year, in this case, 2020.
Due to the CARES Act, if the loss creates an overall net operating loss, it can be carried back up 5 years to be used against taxable income.3
The determination of which losses qualify are based on facts and circumstances, so taxpayers should consult their tax advisors to determine what, if any, may qualify and which year they should be taken in.
Our professional tax experts are here to help you determine if you qualify. Contact us today.
Citations:
1. https://www.fema.gov/disasters/coronavirus/disaster-declarations
2. https://www.irs.gov/pub/irs-drop/rp-16-53.pdf
3. https://www.shearman.com/perspectives/2020/04/claiming-refunds-for-corporate-net-operating-loss-carrybacks-under-the-cares-act#:~:text=Under%20the%20CARES%20Act%2C%20taxpayers,TCJA%20taxable%20years%20through%202020
About the Author
Brad Pauley, CPA, Director
Tax, Sports & Entertainment
Brad Pauley is a Tax Director at KROST. Brad has over 20 years of experience providing tax advice, projection, and compliance services to clients in a variety of different businesses and industries. His areas of focus include high net worth individuals and their closely held businesses, including athletes, entertainers, service professionals, and owners/operators of real estate including like-kind exchanges. » Full Bio