The President issued an emergency declaration in response to the coronavirus pandemic under the Stafford Act and subsequently approved major disaster declaration requests under Sec. 401(a) of the Stafford Act for all 50 states. Jurisdiction for the state of emergency, which took effect January 20, 2020, provides relief and assistance to businesses – including tax relief. Businesses experiencing financial loss directly due to COVID-19, during the disaster year, may elect to accelerate those losses to the 2019 fiscal year.
To accelerate a loss under these relief provisions:
- Compensation for the loss cannot come from insurance or otherwise
- It must be by a closed and completed transaction
- The loss must be caused by an identifiable event
- The losses sustained must relate to the disaster event and must be sustained during the taxable year of the event
Potential losses to accelerate on the preceding year tax return, if directly attributable to COVID-19:
- Abandonment of business deals for costs otherwise capitalized
- Abandonment of leasehold improvements
- Costs related to the closure of store, branch, and facility locations
- Inventory spoilage during the government shutdown
- Losses from the sale or exchange of property
- Mark-to-market securities
- Permanent retirement of fixed assets
- Prepaid events for travel, conference space, and hotel rooms when a refund or credit is not provided
- Prepaid expenses to fulfill a contract when the contract is canceled
- Payments to cancel contracts, leases, or licenses
- Worthless securities (excluding bad debts)
The election to accelerate the loss is done on an original or amended 2019 tax return. This is a temporary tax adjustment, meaning any loss accelerated into the preceding tax year will no longer offset the current year activity.
For mortgage bankers, there may be losses on hedge positions or mortgage loans held for sale on closed deals that can be taken in 2019. All losses must be the direct result of the current coronavirus pandemic.
If the disaster loss creates a Net Operating Loss (NOL) in 2019, the taxpayer may have the added benefit of carrying back the NOL up to 5 years.
If you would like to discuss your filing options under the disaster relief provisions related to COVID-19, please contact your Spiegel tax manager.
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.