New rules allow more time to elect to take disaster loss in prior year

Hurricane and flooding prompt the relief measure.
By Sally P. Schreiber, J.D.

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 the regulations after Hurricane Matthew and related flooding caused federally declared disasters last autumn in the southeastern United States. They 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.

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 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, which was also issued in October and contains additional rules to ensure consistent return positions by taxpayers so they take a loss in only one tax year.

  • T.D. 9789

—By Sally P. Schreiber, J.D., a JofA senior editor. 

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