Taxpayers may deduct casualty losses in prior years

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 required the IRS to issue several extensions of time to make the election after large natural disasters.

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 procedures for making or revoking the election are described in both the final regulations and in Rev. Proc. 2016-53, which contains additional rules to ensure consistent return positions by taxpayers so they take a loss in only one tax year, and is not affected by the final regulations.

The final regulations, which are effective for elections and revocations made on or after the date they are published as final in the Federal Register, also remove Temp. Regs. Sec. 1.165-11T.

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.