How Taxpayers Can Use Section 165(i) of the Tax Code To Deduct COVID-19 Losses

  • June 25, 2020

BY: DUT LeBLANC  |  Executive Vice President, Argent Financial Group

Dut LeBlanc

Individuals whose wealth has been negatively affected by the COVID-19 pandemic may be eligible to deduct certain losses attributable to the pandemic on their 2019 and/or their 2020 tax returns under a special provision in the U.S. tax code – Section 165(i) – related to natural disasters.

Most people are not familiar with – or even aware of – Section 165(i). It usually applies to taxpayers who suffer financial losses due to a hurricane, tornado, earthquake or fire. When President Trump declared COVID-19 a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, it opened the door for taxpayers to take advantage of Section 165(i) and potentially reduce the amount of taxes paid to the IRS.

There are limits to what can be deducted – and how much – on tax returns. For example, the deduction must exclude costs that are covered by insurance. Additionally, taxpayers must have an established cost basis in the property or asset that has been financially impacted. Taxpayers also must prove that COVID-19 caused the loss.

How Section 165(i) Can Be Applied To Tax Returns

In general, Section 165(i) will affect your tax returns as it relates to losses to a business you own or losses to your property or investments. The IRS treats each loss differently, so please consult with an experienced tax advisor to determine its overall impact on your specific situation.

  1. Possible eligible business losses
  • Costs or losses incurred when permanently or temporarily closing a business, facility or store
  • Inventory losses
  • Nonrefundable expenses related to business travel
  • Costs related to terminating contracts due to COVID-19
  1. Possible eligible property losses
  • Losses on the sale of a rental property, such as a home, condominium or apartment
  • Costs to repair property that exceed insurance coverage
  1. Possible eligible investment losses
  • Losses incurred in the sale of marketable debt or equity securities
  • Losses incurred in the sale of private debt or equity securities

Not all coronavirus-related impairments, costs or losses fall under Section 165(i). Examples include loss of revenue or normal operating expenses. Again, consult with a tax expert to determine how COVID-19 will affect your tax returns.

Opportunity To Lower 2019 Taxes

For many people, 2019 was a pretty good year. The economy grew, wages modestly increased and the stock market climbed higher – resulting in higher taxes being paid to local, state and federal governments for the 2019 tax year. Section 165(i) provides many people with a new opportunity to reduce their tax bill – one they mostly likely have never used – for 2019.

The IRS gave taxpayers a break and extended the 2019 tax filing deadline from April 15 to July 15, so there’s still time to take advantage of Section 165(i) deductions. Returns can be extended to Oct. 15, but taxes must be paid on July 15. Taxpayers who already have filed can amend their returns.

COVID-19 has had an enormous economic and emotional impact on many individuals and families. Section 165(i) is one small way that taxpayers may lighten the financial burden.

As mentioned previously, please consult with your tax advisor to see if you may benefit from this this tax deduction. If you would like additional information about Section 165(i), please call me at (318) 455-7930 or contact one of our professionals at Argent Financial Group.