IRC §165(i) provides for a taxpayer to electively claim a loss on a federally declared disaster on the return for the year prior to when the disaster occurred. The IRS has issued Revenue Procedure 2016-53 and proposed regulations (REG-150992-13) for taxpayers who wish to take advantage of this election.
The proposed regulations would set the deadline for both making the election (six months after the due date of the tax return for the year of the disaster excluding any extensions) and for revoking a previous election (90 days after the due date for making the election).
The Revenue Procedure outlines how the election is to be made. Generally, a taxpayer makes the election by preparing either an original or (more likely) amended return for the year preceding the disaster claiming the loss. Either return must include a statement the taxpayer is making the election that contains the following information:
· The name or a description of the disaster and date or dates of the disaster which gave rise to the loss.
· 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.
On an original return that information will be provided on line 1 or line 19 (as applicable) of Form 4684. If those lines do provide sufficient space to provide the information (which seems likely), the taxpayer may provide the information on a PDF attached to the electronically filed return (or presumably on a statement with a paper filed return).
For amended returns, the information may be provided by “any reasonable means” by the taxpayer. The procedure notes:
Reasonable means include, but are not limited to, 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 required by section 3.02 in either the Explanation of Changes in Form 1040X (Amended U.S. Individual Income Tax Return), Form 1120X (Amended U.S. Corporation Income Tax Return), or other appropriate form, or directly on the Form 4684, attaching a statement if there is insufficient room on the form.
The procedure provides that if the taxpayer claimed the loss on the return for the year of the disaster, the taxpayer may not make the §165(i) election unless the taxpayer files an amended return for the year of the disaster removing the loss on or before the date the taxpayer files the amended return for the year preceding the disaster. Similarly, if a taxpayer wishes to revoke the election and take the deduction in the year of the disaster, an amended return for the year preceding the year of deduction removing the loss the must be filed before or concurrent with the filing of the return claiming the loss for the year of the disaster. As well, the taxpayer must make arrangements to pay any additional tax and interest due as a result of the amended return in either situation.
Although the regulations provide for a due date, the revenue procedure in the interim provides for similar rules currently in Section 5. That Section provides:
.01 A taxpayer must make the § 165(i) election on an original federal tax return or an amended federal tax return for the preceding year. The original federal tax return or amended federal tax return must be filed on or before the date that is six months after the original due date for the taxpayer's federal tax return for the disaster year (determined without regard to any extension of time to file). See § 1.165-11T(f).
.02 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.
The procedure provides details on revoking the election and the information to provide in that case in Section 6.
The procedure is effective for any actions that can be made or taken after October 13, 2016.