Taxpayers may deduct casualty losses in prior years

The final regulations allow more time to make the election.
By Sally P. Schreiber, J.D.

The IRS finalized without changes proposed regulations (REG-150992-13) it had issued in 2016, and removed temporary regulations (T.D. 9789), governing the time to elect or revoke an election under Sec. 165(i) to accelerate a loss attributable to a federally declared disaster. 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 rules in effect 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 had required the IRS to provide extensions of time to make the election in the wake of a number of large natural disasters over the previous 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 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.

  • T.D. 9878

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

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