The IRS has issued final and temporary regulations extending the due date for the election to deduct in the prior tax year a loss attributable to a federally-declared disaster, and for revoking such an election, as well as a revenue procedure explaining how to make or revoke the election.
Casualty losses are generally allowed as a deduction only for the tax year in which the loss is sustained (disaster year). However, a taxpayer may elect to treat a loss occurring in a federally-declared disaster area as sustained in the tax year immediately prior to the disaster year.
Taxpayers made the election on the original return, amended return, or refund claim that must be filed on or before the later of: (1) the due date (without extension) of the tax return for the disaster year; or (2) the due date (without extension) of the tax return for the preceding year.
The final and temporary regulations issued on October 13 generally provide that the due date for electing to deduct in the prior tax year a loss attributable to a federally-declared disaster is six months after the due date (without extension) for filing the taxpayer's federal income tax return for the disaster year. The temporary regulations also extend the time period for revoking the election to 90 days after the due date for making the election.
The new rules also prevent the taxpayer from deducting the same loss in more than one tax year, if the taxpayer has already deducted the loss for the disaster year, the taxpayer must amend the disaster-year return to make the disaster loss election in the prior year. Similarly, the taxpayer must amend the prior-year return to revoke the election before filing a return or amended return to deduct the loss in the disaster year. The temporary regulations also define the terms federally declared disaster; federally declared disaster area; disaster loss; disaster year; and preceding year for purposes of the temporary regulations.
Rev. Proc. 2016-53, I.R.B 2016-44, was issued with the temporary regulations to specify how a taxpayer would make or revoke an election. The revenue procedure states that the taxpayer need not request an extension of time to file the federal tax return for the disaster year in order to benefit from the due date identified in the temporary regulations.
A taxpayer makes the election by deducting the disaster loss on either an original or amended federal tax return for the preceding year. A taxpayer must include with the return an election statement indicating the taxpayer is making a Code Sec. 165(i) election. The election statement must contain the following information:
- The name or a description of the disaster and date or dates of the disaster that gave rise to the loss; and
- The address, including the city, town, county, parish, state, and zip code, where the damaged or destroyed property was located at the time of the disaster.
For an election made on an original tax return, the above information generally must be provided on Lines 1 or 19 (as applicable) of Form 4684, Casualties and Thefts. A taxpayer filing an electronic return may attach the information as a PDF document if there is insufficient space on Lines 1 or 19. For an election made on an amended return, a taxpayer may provide the information by any reasonable means, such as writing the name or a description of the disaster, the state in which the damaged or destroyed property was located at the time of the disaster, and "Section 165(i) Election" on the top of the Form 4684 and providing the rest of the information in either the Explanation of Changes on Form 1040X, Form 1120X, another appropriate form, or directly on the Form 4684, attaching a statement if there is insufficient room on the form. A taxpayer may revoke a previously made election by filing an amended return for the preceding year that contains a revocation statement. The revocation statement must include the following information:
- A statement clearly showing that the Section 165(i) election is being revoked;
- The name or a description of the disaster and date or dates of the disaster for which the election was originally claimed; and
- The address, including the city, town, county, parish, state, and zip code, where the damaged or destroyed property was located at the time of the disaster and for which the taxpayer originally claimed the election.
The above information should be provided in the Explanation of Changes on Form 1040X, Form 1120X, or other appropriate form, or on a statement attached to the amended return. The final and temporary regulations and revenue procedure are effective October 13, 2016, and apply to elections, revocations, and any other related actions that can be made or taken on or after October 13, 2016.