Refund opportunity may exist for those affected by Harvey, Irma
Taxpayers are able to claim deduction in year prior to year of loss
INSIGHT ARTICLE |
A taxpayer that has suffered a loss as a result of either Hurricane Harvey or Hurricane Irma should be aware of a unique income tax provision that may enable the acceleration of a deduction to the taxpayer’s 2016 tax return. Taxpayers whose 2016 tax return has not yet been filed should consider this opportunity when preparing that return; those who have already filed should evaluate whether amending that return might create a refund opportunity.
Losses - generally
Taxpayers such as C corporations, S corporations and partnerships that are engaged in a trade or business are typically allowed a deduction for any loss sustained in that business that isn’t otherwise compensated for by insurance. Individuals are also entitled to a deduction in situations where either: a) the loss is sustained in a trade or business, b) the loss is incurred in a transaction entered into for profit, or c) the loss arises from a fire, storm, shipwreck, or other casualty, or from theft. Taxpayers generally are required to claim those losses in the year they are incurred, provided there is no reasonable prospect of recovery (e.g. through insurance).
In situations where the loss relates to a federally declared disaster, taxpayers have the unique opportunity to report the loss in the tax year preceding the taxable year in which the disaster occurred. Therefore, taxpayers that suffered property losses in Texas, Florida, or Georgia as a consequence of either Hurricane Harvey or Hurricane Irma have the option of incorporating the loss into their 2016 tax returns and potentially generating a refund.
Taxpayers wanting to make this election can do so either on an originally filed tax return or an amended return for the year preceding the year of loss. The election must be made within six month of the original due date for the tax return in the year of loss. This means, for example, that a calendar year S corporation wanting to claim a disaster loss on its 2016 return must make this election no later than Sept. 15, 2018 (i.e. six months after the March 15, 2018, due date of its 2017 tax return). Meanwhile, an individual who suffered a loss would have until Oct. 15, 2018, to make this election.
Amount of loss deduction
A taxpayer’s allowable loss is the lesser of:
- The reduction in the property’s fair market value as a consequence of the disaster, and
- The property’s tax basis
That loss must be reduced by the amount of any insurance or other recovery received or potentially recoverable. So in circumstances where there is an outstanding claim for reimbursement, the taxpayer generally cannot claim the loss until the taxpayer can determine with reasonable certainty whether the reimbursement will be received. But once it becomes clear that there is no reasonable prospect of recovery, the taxpayer is entitled to the loss deduction. The deductible amount should be determined based on the facts that exist on the date the taxpayer claims the loss.
The IRS granted taxpayers that were impacted by Hurricane Harvey an extended period until Jan. 31, 2018, to file certain returns due on or after Aug. 23, 2017; the IRS granted similar relief to victims of Hurricane Irma for return due on or after Sept. 4, 2017. As a consequence, many impacted taxpayers whose 2016 tax returns were on extension may have not yet filed those tax returns. Those taxpayers should evaluate whether claiming this loss on the 2016 return may be beneficial. Impacted txpayers that have already filed their 2016 returns should also consider whether amending that return to accelerate this deduction could generate current tax benefits. There are a number of considerations with respect to this decision – including the ability to estimate the loss, whether potential recoveries may still exist, and even whether potential changes to corporate and individual tax rates might create an opportunity to generate a permanent tax savings from making this election. Those issues should be evaluated carefully before deciding whether to take advantage of this election.
 If income-producing property is totally destroyed, and the fair market value of the property before the disaster is less than the property’s basis, the loss will be the property’s basis.