Individuals who suffered losses in the May 2010 floods in the federally declared disaster area that encompassed much of Western and Middle Tennessee have until April 18, 2011 to amend their 2009 federal income tax returns to claim their loss in 2009 rather than 2010. Amending 2009 returns would enable these individuals to take advantage of the more favorable rules for the deduction of disaster losses that were available in 2009. For a more detailed discussion of the disaster loss rules as applicable to victims of the May 2010 flood, please see our earlier bulletin at this link.
Victims suffering casualty losses attributable to a federally declared disaster in a federally declared disaster area occurring after December 31, 2007 and before January 1, 2010 are entitled under the provisions of the National Disaster Relief Act of 2008 to the following significant benefits:
- All individuals, not just those who itemize deductions, can claim the casualty loss deduction regardless of the taxpayers adjusted gross income level;
- Elimination of the usual requirement that non-business casualty losses only be allowed to the extent they exceed 10% of a taxpayer's adjusted gross income; and
- A five-year net operating loss (NOL) carryback for qualified natural disaster losses.
The National Disaster Relief Act also provides certain other benefits to businesses suffering from casualty losses attributable to a federally declared disaster in a federally declared disaster area.
These beneficial provisions expired December 31, 2009, and do not apply to casualty losses for federally declared disasters occurring in 2010 and reported on the 2010 return. A taxpayer is permitted, however, to make an election to take a disaster loss into account for the taxable year immediately preceding the taxable year in which the disaster occurred. If such an election is made by the taxpayer, the disaster is treated as occurring in the taxable year for which the deduction is claimed. Accordingly, the beneficial provisions in the Disaster Relief Act may still be claimed for 2010 disasters, but only if the election is made to claim the casualty loss deduction in the taxpayer's 2009 taxable year and not the 2010 taxable year.
The election to treat a disaster loss that actually occurred in 2010 as if it had occurred in 2009 is made by amending the 2009 tax return but the amendment must be made on or before the due date for the taxpayer's 2010 return (determined without regard to any extension of time to file). Accordingly, individuals and calendar year partnerships and LLCs must amend their 2009 returns by April 18, 2011 in order to make the election.
If these calendar year taxpayers fail to make the election to claim their disaster loss in 2009 by filing an amended return by April 18, 2011, they will lose the ability to make the election and will only be able to take the casualty loss on their 2010 returns, subject to the restrictions generally applicable to casualty losses. Most significantly, the casualty loss would not be deductible for non-business personal use property except to the extent it exceeds 10% of the taxpayer's adjusted gross income. Additionally, if claiming a casualty loss in 2010 would wipe out the taxpayer's 2010 income, the net operating loss generated by the excess casualty loss can only be carried back three years if the casualty loss is incurred by an individual or by certain small businesses and two years for any other taxpayers. If reported on the 2009 return the net operating loss generated by the excess casualty loss can be carried back five years.
For more information, please contact Leigh Griffith, Shane Morris or any member of the Waller Lansden Tax Practice at 615-244-6380.
WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE PRECEDING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.