Cash Refund Opportunities - Taxpayer Ability to Accelerate 2020 COVID-19 Losses to the 2019 Tax Year
August 19, 2020
By: Matt Campbell
Cash Refund Opportunities -- Taxpayer Ability to Accelerate 2020 COVID-19 Losses to the 2019 Tax Year and other Net Operating Loss Carryback Refund Opportunities
IRC Section 165(i) and related Treasury regulations provides businesses and individuals an opportunity to take "disaster losses" into account in the taxable year immediately preceding the taxable year in which the disaster occurred if the President declares an emergency pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act ("Stafford Act"). Since the President declared the coronavirus pandemic an emergency under the Stafford Act on March 13, 2020, this declaration gives taxpayers the option to carryback certain losses incurred in the 2020 tax year, as a result of the pandemic, to the 2019 tax year. This ability for affected taxpayers can generate an additional tax refund and cash that can be used for current financial needs.
Types of Losses Covered:
Business and personal casualty losses must be attributable to the COVID-19 pandemic to be eligible for this election and are limited to the amounts not otherwise reimbursed, by insurance or otherwise. Losses carried back under Section 165(i) must be otherwise allowable as deductions under Section 165. For example, the taxpayer must have a basis in the property, and the loss must be fixed by identifiable events actually sustained during 2020 and documented by completed transactions. The election to apply Section 165(i) applies to the entire loss incurred as a result of the federally declared disaster. Any disaster loss for which an election is made under Section 165(i), cannot be deducted in a subsequent tax year.
For calendar year taxpayers suffering losses from the coronavirus pandemic in 2020, the election must be made by September 15, 2021 for partnerships and S-corporations and by October 15, 2021 for individuals, corporations, or trusts. For those just receiving this news, this gives less than a month to make the election to carryback 2020 losses to the 2019 tax year for cash refunds.
CARES Act Net Operating Loss Carryback and Refund Opportunities:
Separately, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") allows taxpayers to elect to carryback net operating losses ("NOLs") generated in the 2018, 2019, and 2020 tax years to the fifth tax year prior to the year the NOL was generated. The IRS has provided guidance on how taxpayers can elect to waive or reduce that carryback provision in Rev. Proc. 2020-24. Corporations or individuals can make the election to carryback NOLs, but partnerships generally may only make the election for 2018 and 2019 under Rev. Proc. 2020-23 (with partners themselves needing to make the election in their individual capacity for prior years). Partners in 2018 and 2019 may elect to carryback NOLs in their individual capacity if the related partnership does not itself make the election to do so.
Taxpayers also can combine the benefits of the Stafford Act and the Cares Act. If a taxpayer makes an election to take Section 165(i) disaster losses from 2020 into account in 2019 that results in a 2019 NOL, the taxpayer would be permitted to carryback that NOL to as far as the 2014 tax year under the provisions of the Cares Act creating additional potential refund opportunities for prior tax years and as those NOLs (if any) roll forward to subsequent years. The application of these rules are nuanced and should be carefully considered to maximize the refund opportunities for which you or your business may be eligible and which may be helpful for current cash flow needs.
For more information, please contact your Hall Estill Tax Attorney