New Rules Allow More Time to Elect to Take Disaster Loss in Prior Year

Taxpayers that want to elect to deduct a disaster loss in the tax year preceding the year in which the disaster actually occurred will have more time to make that election under temporary regulations the IRS issued on Thursday (T.D. 9789). The new 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 temporary regulations also provide definitions of “federally declared disaster,” “federally declared disaster area,” “disaster loss,” “disaster year,” and “preceding year,” for these purposes.

The new rules are effective immediately, the IRS said, because it anticipates a significant number of casualty losses arising from recent instances of flooding in areas located throughout the United States, including Texas and Louisiana. The latest federal disaster areas were declared in Georgia, Florida, North Carolina, and South Carolina as a result of Hurricane Matthew. The IRS on Tuesday extended certain filing and payment due dates until March 15, 2017, for victims of Hurricane Matthew in parts of North Carolina that have been declared disaster areas by FEMA and expects to expand that relief to other affected areas soon.

Under the prior rules (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 required the IRS to issue a number of extensions of time to make the election after large natural disasters such as Hurricane Katrina in 2005 and Hurricane Sandy in 2012.

Under the new 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 temporary regulations also extend the period of time for revoking the election to 90 days after the due date for making the election.

The procedures for making or revoking the election are described in Rev. Proc. 2016-53, also issued on Thursday, which also contains additional rules to ensure consistent return positions by taxpayers so they take a loss in only one tax year.

—Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.