Final regulations permit casualty loss deductions in prior years

By Sally P. Schreiber, J.D.

In T.D. 9878, the IRS finalized proposed regulations (REG-150992-13) it had issued in 2016, without changes, and removed temporary regulations (T.D. 9789) published in connection with the proposed regulations. Under the final regulations, as under the temporary and proposed regulations, taxpayers that want to elect to deduct a disaster loss in the tax year preceding the year in which the disaster actually occurred have more time to make that election. The final regulations govern the time to make an election under Sec. 165(i) to accelerate a loss attributable to a federally declared disaster and the time allowed to revoke those elections. Sec. 165(i) allows taxpayers to deduct a "loss occurring in a disaster area and attributable to a federally declared ­disaster" in the tax year immediately preceding the tax year the disaster occurred.

The final regulations also provide definitions of "federally declared disaster," "federally declared disaster area," "disaster loss," "disaster year," and ­"preceding year," for these purposes.

Under the prior rules before 2016 (Regs. Sec. 1.165-11(e)), a taxpayer had to make the election to take a loss in an earlier tax year by the unextended due date for the taxpayer's return, generally April 15. This short period to make the decision whether to elect relief put undue pressure on taxpayers and has ­required the IRS to provide extensions of time to make the election in the wake of a number of large natural disasters over the past 10 years.

Under the final rules, the deadline for the election to claim the loss on the prior year's tax return is six months after the due date for filing the taxpayer's federal income tax return for the disaster year (determined without regard to any extension of time to file). The regulations also extend the period of time for revoking the election to 90 days after the due date for making the election.

The final regulations apply to elections and revocations that are made on or after Oct. 16, 2019.    

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