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March 26, 2020

IRC Section 165(i) Opportunity

Posted by COVID-19 Rapid Response Team

The COVID-19 crisis has resulted in, and continues to result in, a myriad of available benefits via the Internal Revenue Code (IRC). One specific code section, IRC Section 165(i), is usually only available for taxpayers in specific geographical areas as a result of a natural disaster such as a hurricane or fire. However, it is currently available to all U.S. taxpayers.

This creates an opportunity for companies to obtain tax refunds for their 2019 tax liability. And with a quick refund via Form 4466 (assuming the taxpayer has overpaid its estimated tax for the year by at least 10% of the expected tax liability), a taxpayer can reasonably expect a refund within 45 days from when the form is filed, which must be filed by the unextended due date (which is now July 15, 2020 for calendar year-end taxpayers).

How It Works

To claim a COVID-19 related disaster loss for the 2019 tax year, taxpayers will need to report the loss on either an original or amended 2019 federal tax return via Form 4684. They will also have to attach a statement providing specific information set out in section 3.02 of Revenue Procedure 2016-53. 

The taxpayer also is expected to maintain supporting documentation of the loss as resulting from the COVID-19 disaster.

Although losses attributable to COVID-19 will not result in the physical damage to property that is generally required for a casualty loss, they will likely result in other types of qualified losses such as:

  • Impaired & worthless securities;
  • Closure of store and facility locations;
  • Abandonment of pending business deals for which costs have been capitalized; or
  • Disposal of inventory, supplies, and other property that has become unsaleable.

Other Considerations

There are some items that taxpayers need to take into consideration:

  • Upon making the election, the taxpayer is required to carryback ALL of its Section 165 losses attributable to COVID-19. 
  • If applicable, the taxpayer will not be able to claim a loss to the extent the taxpayer has an outstanding claim for reimbursements for the loss from insurance companies.
  • Some states may not conform. 

Seek Technical Expertise

Reach out to a competent tax adviser with experience in this area to help you:

  • identify, quantify, document and meet the procedural requirements for claiming losses using the one-year carryback election.
  • perform a state conformity analysis to help you maximize this opportunity.

Armanino’s tax experts can help you address issues related to the items outlined above.

We’re Here to Help

We’re closely monitoring the COVID-19 changes, and we will send out updates as they become available. Reach out to our Rapid Response Team below if you need further information on this topic.

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