Have You Suffered Any Losses Due to COVID-19? Some 2020 Losses May Be Deductible in 2019 by Arthur J. Lieberman
Posted on April 27, 2020
by
Art Lieberman
The COVID-19 crisis has caused major economic hardship for many companies, making it imperative for businesses of all kinds to increase cash flow to ensure survival. Taxpayers should not overlook the potential to reduce 2019 taxes and/or generate refunds of taxes previously paid from 2014 through 2018 by making an election to deduct eligible 2020 COVID-19 losses on their 2019 tax returns.
Under a longstanding rule, a taxpayer may elect to accelerate eligible losses due to a federally declared disaster into the immediately preceding taxable year. The taxpayer’s loss must relate to the disaster, and it must be sustained during the taxable year of the disaster in order to be eligible for this election. Additionally, the loss must not be compensated by insurance or otherwise, it must be caused by an identifiable event, and it must be evidenced by a closed or completed transaction.
This rule is typically used to accelerate deductions into the prior year resulting from losses from physical damage occurring in the current year to tangible property from disasters such as hurricanes, earthquakes or tornadoes. In such cases, the loss to tangible property eligible for acceleration is relatively easy to identify and quantify based on the difference between the property’s fair market value before and after the casualty occurred, reduced by any insurance recovery. However, unlike typical disaster losses, many COVID-19 losses relate to intangible property and may be more difficult to identify and quantify. Worthless securities, write-offs of capitalized costs (including lost buyer deposits) for deals abandoned because of COVID-19, and costs of prepaid events cancelled are examples of 2020 COVID-19 intangible property losses that may be eligible for deduction in 2019 under the right set of facts. Spoiled inventory, abandonment of leasehold improvements, and abandonment of other fixed assets are examples of COVID-19 tangible property losses that may be eligible for deduction in 2019 under the right set of facts. Examples of deductions that would not be eligible include bad debts and employee severance.
Any net operating losses created in 2019 as a result of the deduction in 2019 of 2020 COVID-19 losses can be carried back up to five years against taxable income from 2014 through 2018.
In all cases, the amount of deductions eligible for acceleration is limited to the adjusted tax basis of the loss property used for purposes of determining gain or loss on a sale. This means that normal 2020 operating expenses and/or reduced 2020 revenues due to business interruption losses do not qualify for acceleration.
Taxpayers can claim eligible loss deductions on their original 2019 tax returns, or they may be able to amend their previously filed 2019 returns to include the deduction. Specific reporting and proper elections must be made in order to qualify for the deduction. The determination of losses eligible for acceleration is highly fact-dependent, so taxpayers should consult their tax advisors to determine what losses, if any, may qualify for this important benefit and how to report them.
About the Author: Arthur J. Lieberman is a director with the Tax Services practice of Berkowitz Pollack Brant Advisors + CPAs, where he works with real estate companies and closely held businesses on deal structuring, tax planning, tax research, tax controversies and compliance issues. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
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