Section 165(i) Disaster Loss Deduction

by John Anthony Castro, J.D., LL.M.

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Executive Summary

You can amend your 2019 U.S. federal income tax return to effectively accelerate the depreciation schedule of any and all assets you’re currently depreciating to claim 100% if you determine the COVID-19 pandemic has effectively rendered them worthless.  This applies to both a personal individual income tax return as well as a business tax return.  It’s best to wait until the close of the year to determine the full loss in value resulting from the pandemic.  Losses are capped to adjusted basis.

This basically means that any individual or business can amend their 2019 tax return to fully expense and deduct any and all assets that they own.  This will generate a significant tax refund to “weather the storm” being caused by the global pandemic.

Introduction

Section 165(i) is a little-known rule allowing a disaster loss to be reported on the prior year’s return.  It applies to disasters at any time of the year, and it most definitely applies to the disaster declared for the COVID-19 pandemic.

The COVID-19 global pandemic has caused significant losses for many businesses.  Assets have become effectively worthless.  Stock has become worthless because of the pandemic and the declared disaster.

Taxpayers can elect to apply these losses to 2019 and amend their 2019 U.S. federal and state income tax returns to claim a refund of taxes paid.  For clarification, this is not a carryback loss; this is a straight election to apply 2020 disaster losses to your 2019 tax return.

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About the Author

John Anthony Castro, J.D., LL.M., is the Managing Partner of Castro & Co., the author of International Taxation in Plain English as well as International Estate Planning in Plain English, an esteemed graduate of Georgetown University Law Center in Washington DC, an OPM Fellow at Harvard Business School, and an internationally recognized tax attorney with offices in New York, Los Angeles, Miami, Chicago, Dallas, and Washington DC.

To provide feedback on this article or suggest an idea for a future article, please contact Tiffany Michelle Hunt, J.D., LL.M., Director of Tax Planning at Castro & Co., at T.Hunt@CastroAndCo.com.


Bluebook Citation: John Anthony Castro, Section 165 Disaster Loss Deduction, Int’l Tax Online Law Journal (June 27, 2020) url.

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