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Cleaning up after the Storm: Evaluating Tax Treatment Information


The Federal Emergency Management Agency has issued a total of 77 disaster declarations this year, 11 of which were related to the damage caused by hurricane Irene. Although the full extent of the economic carnage is still being tallied, Irene is estimated to be a billion-dollar weather event -- the 10th billion-dollar natural disaster this year. Given that much of the East Coast was declared a federal disaster area by President Obama, this designation creates opportunity for special tax treatment. Taxand US highlights some of these tax-related provisions with a focus on business taxpayers.


Postponements Related to the Storm
Once an area is declared a disaster area, the IRS is permitted to postpone certain deadlines and grant relief to taxpayers whose principal place of business is located in the covered disaster area. In the case of Irene, if your principal place of business (or the location of your business records needed to prepare an accurate return) is located in one of the designated disaster counties, the IRS has extended your filing deadline to October 31, 2011 (for corporate income tax returns with extended due dates between August 26, 2011 and October 31, 2011).


Disaster Loss Deduction -- Acceleration Opportunity under Section 165(i)
Casualty losses generally must be deducted in the year the casualty occurs. However, under IRC Section 165(i), taxpayers (including individuals, trusts, estates, partnerships, associations or corporations) may elect to deduct disaster area losses in the year preceding the loss year. Thus, 2011 disaster losses may be deducted in either your 2011 or 2010 income tax return.


Although the possibility of a quick tax refund is attractive for taxpayers suffering the cash demands of disaster recovery, the decision to make a Section 165(i) election to deduct a disaster loss in the year preceding the loss year requires careful analysis. Without this analysis, a Section 165(i) election may result in a greater total tax than if the election had not been made.


Taxand US provides a full analysis of what the special tax treatment means for businesses on the US East Coast



Taxand's Take

An election under Section 165(i) to accelerate a disaster loss deduction to the preceding year can be the silver lining in the otherwise black cloud of a hurricane. However, whether to pursue this election or not requires careful analysis of your company's overall tax position. Finally, don't underestimate the importance of good documentation in supporting your disaster loss deduction with taxing authorities as well as proving your claim to the satisfaction of insurers.

Your Taxand contact for further queries is:

Paul Helderman
T. + 1 212 763 9760

Taxand's Take Author