IRS Natural Disaster Provisions Provide Deductions for COVID 19 Losses for Small Business

Small Business Alert!
2020 Losses & Filing 2019 Tax Returns – IRC 165(i)


We hope this finds you safe, healthy and well. As always, we want to help inform and alert you about timely, important information that can affect your 2019 Tax Returns – especially if you are a small business.

On March 13th, the federal emergency declaration declared triggered IRC Section 165(i), which helps with natural disaster losses. A federal emergency declaration triggers a number of tax provisions that small businesses can use to get financial relief while weathering the impact of the storm. While IRC Section 165(i) is most commonly accessed in the wake of an actual storm or other natural disaster, it was activated when the President declared a nationwide emergency in response to the COVID-19 pandemic on March 13, 2020.

This declaration may be particularly useful to small businesses because it allows a deduction of 2020 COVID-19 losses on last year’s return—meaning it could provide financial relief right now, without the need to wait and file the 2020 return, by which time it might be too late for many small business owners. Here’s what you need to know;

1) Section 165(i) does not allow a deduction for all general losses, but even in the absence of the physical damage caused by a natural disaster, many small businesses can benefit from current tax relief by accelerating COVID-19 losses to 2019

2) When Section 165(i) is triggered, it gives taxpayers the option of taking a loss deduction for the year before the year in which the loss was actually sustained.

3) To claim a loss under Section 165(i), the taxpayer must be able to show that property losses were directly caused by the COVID-19 pandemic. You must further document that;

• The loss could not be reimbursed through insurance or otherwise
• The loss can be evidenced by “closed and completed transactions”
• The loss was related to the disaster and sustained in the year the disaster occurred

Businesses who have permanently closed store locations, abandoned pending business deals, and made termination payments based on cancelled contracts or deals can also benefit from accelerating those losses back to 2019. Businesses who lost money because of pre-paid business travel, or pre-payment on materials where the contract was cancelled, may be eligible. Pushing the 2020 losses into 2019 could generate a larger Net Operating Loss, which can now be carried back to earlier tax years when the business may have been more profitable.

Those who have yet to file a 2019 return can make the election on their original tax return (remembering that the due dates for filing 2019 returns were extended in response to COVID-19, so many businesses may have waited to file). Many small businesses are understandably focused on the new relief provided by the CARES Act and FFCRA. In reality, some of these businesses will need more relief than is available under those laws to survive. Pre-existing IRC Section 165(i) can offer a lifeline to certain business owners who have suffered concrete losses because of COVID-19.

There are many more details in the declaration and every business is unique. If you need to learn more, get in touch with me. I’m available for a non-obligatory consultation at any time. You can also call the office at 858-376-1501 or contact us to schedule an electronic conference. I look forward to hearing from you.

Learn more about other COVID 19 related business and tax matters on our COVID 19 Information Page.

Stay healthy and safe,

Janathan L. Allen
Allen Barron, Inc.

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