IRS Extends Deadline For Deducting Colorado Disaster-Related Losses

Notice 2014-20, 2014-15 IRB, IR 2014-35

In a Notice, IRS has given Colorado flood victims an extension until Oct. 15, 2014 to decide whether to claim disaster losses arising from last September’s flooding on either their 2012 or 2013 returns. Without this extension, these taxpayers would have had to make this decision by the original due date for their 2013 return (typically April 15).

Facts. From Sept. 11 through Sept. 30, 2013, severe storms, flooding, landslides, and mudslides in Colorado (Colorado major flooding event) caused significant damage. The President issued major disaster and emergency declarations under the authority of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) for certain areas in Colorado. The Federal Emergency Management Agency (FEMA) determined certain areas within Colorado to be eligible for Public Assistance or Public Assistance and Individual Assistance under the Stafford Act.

Claiming disaster loss on previous year’s return.  A taxpayer that sustains a loss attributable to a disaster occurring in a Presidentially declared disaster area may elect to deduct that loss on his return for the tax year immediately preceding the tax year in which the disaster occurred. (Code Sec. 165(i)) Generally, a taxpayer must make this election by filing a return, an amended return, or a refund claim on or before the later of (i) the due date of his income tax return (determined without regard to any filing extension) for the tax year in which the disaster actually occurred, or (ii) the due date of his tax return (determined with regard to any filing extension) for the immediately preceding tax year. The election is irrevocable 90 days after it is made. (Reg. § 1.165-11(e))

RIA observation: Depending on an individual’s circumstances, claiming losses on a 2012 return versus a 2013 return could result in greater tax savings for some taxpayers. In some cases, the election may result in a net operating loss, which could result in a refund from an earlier year to which it is carried. On the other hand, deducting the loss in the year the loss actually occurred may result in bigger tax savings if the taxpayer is in a higher bracket in that year.

Under Code Sec. 7508A, IRS has the authority to postpone the time for performing certain acts under the internal revenue laws for up to one year for a taxpayer affected by a Presidentially declared disaster.

Postponed deadline. Under the authority of Code Sec. 7508A, affected taxpayers, as defined below, are granted a postponement to Oct. 15, 2014, to make a Code Sec. 165(i) election for losses attributable to the Colorado major flooding event. They are directed to include a reference to Notice 2014-20, with their return, amended return, or refund claim on which they are making a postponed Code Sec. 165(i) election under the new Notice. They also should specify the date or dates of the disaster that gave rise to the loss, and the city, town, county, and State in which the property that was damaged or destroyed was located at the time of the disaster.

IRS notes that the extra time is available, regardless of whether a taxpayer requests a tax-filing extension for either year. (IR 2014-35)

Affected taxpayers.  A taxpayer is an affected taxpayer to which the postponement applies if:

1.            The taxpayer sustained a loss attributable to the Colorado major flooding event;

2.            The loss occurred in a covered disaster area for the Colorado major flooding event (regardless of whether the taxpayer’s principal residence or principal place of business is in one of the covered disaster areas);

3.            The deadline for the taxpayer to make a Code Sec. 165(i) election for that loss, but for this notice, would be before Oct. 15, 2014.

Affected taxpayers for purposes of Notice 2014-20 are not affected taxpayers for purposes of other relief provided by IRS unless the taxpayer separately qualifies as an affected taxpayer under other guidance issued by IRS.

Thus, eligible taxpayers are those who suffered uninsured or unreimbursed losses resulting from severe storms, flooding, landslides and mudslides in the 20 federally-designated disaster area counties from Sept. 11 to Sept. 30, 2013. The disaster area counties are Adams, Arapahoe, Boulder, Broomfield, Clear Creek, Crowley, Denver, El Paso, Fremont, Gilpin, Jefferson, Lake, Larimer, Lincoln, Logan, Morgan, Pueblo, Sedgwick, Washington and Weld. (IR 2014-35)

IRS also notes that, though taxpayers who miss the new Oct. 15 cut-off will lose the option of claiming their losses for 2012, they will still be able to claim them on an original or amended 2013 return. (IR 2014-35)

References: For the election to deduct disaster losses in the preceding year, see FTC 2d/FIN ¶ M-2001 ; United States Tax Reporter ¶ 1654.520 ; TaxDesk ¶ 369,002 ; TG ¶ 16977.

A special thanks to Steve Rael Jr. with Thomson Reuters for posting the link.