For businesses experiencing financial loss due to the current COVID-19 crisis, there may be a need to increase cash flow in the short term. One opportunity to increase immediate cash flow is by accelerating losses to the 2019 tax year under Section 165(i) of the US Tax Code instead of waiting until the 2020 tax year. By accelerating losses to the 2019 tax year, businesses can reduce current income, and therefore reduce cash tax payments or potentially receive refunds of prior year taxes paid.
Under Section 165(i), at the election of the taxpayer, losses directly attributable to a federally declared disaster may be accelerated to the taxable year immediately preceding the tax year in which the disaster occurred. On March 13, 2020, the President declared COVID-19 as a federal disaster under the guidelines of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, activating the Section 165(i) provision and enabling COVID-19 losses experienced in 2020 to be declared on 2019 taxes.
Not all losses will qualify for acceleration. A loss must be proven as a direct result of the COVID-19 disaster, and the onus is on the taxpayer to prove causality. Indirect losses such as lost revenue or loss of potential due to buyer resistance are generally not accepted for acceleration under Section 165(i).
For current financial losses to qualify for accelerated declaration, all four provisions must be filled:
the loss cannot be otherwise compensated, whether by refund, insurance or other means
the loss must be caused by an identifiable event
the loss must be evident by closed and complete transactions
the loss must be directly related to the event and be sustained during the year of the event.
Some examples of qualifying losses include discarded inventory that spoiled during a government-mandated shutdown; prepaid business expenditures such as event space, hotels, travel, etc. that were not refunded or credited upon cancellation; termination payments to cancel contracts, licenses or leases; and prepaid raw materials or other items purchased to fulfill a contract that has since been cancelled. This list is not exhaustive, nor is it a guarantee that your specific losses will qualify.
The deadline to make such an election is six months after the original tax deadline of the tax year in which the crisis occurred. Regarding COVID-19, this puts the deadline to make the election on any original or amended return in Fall of 2021.
Please consult your tax advisor to determine if this opportunity is available to you and would be beneficial to your business. For additional assistance, please contact us at 301-691-3600 or firstname.lastname@example.org.