The complexities of the section 165(i)(1) disaster loss election.The treatment of disaster losses is becoming an increasingly important issue in tax practice. Insurance industry experts have projected that a $50 billion disaster in the U.S. is a very real possibility in the near future.(1) Insurance companies are responding to the growing number of losses by increasing rates to prohibitively pro·hib·i·tive also pro·hib·i·to·ry adj. 1. Prohibiting; forbidding: took prohibitive measures. 2. high levels. In high-risk high-risk adjective Referring to an ↑ risk of suffering from a particular condition Infectious disease Referring to an ↑ risk for exposure to blood-borne pathogens, which occurs with blood bank technicians, dental professionals, dialysis unit areas (e.g., coastal Florida Florida, state, United States Florida (flôr`ĭdə, flŏr`–), state in the extreme SE United States. A long, low peninsula between the Atlantic Ocean (E) and the Gulf of Mexico (W), Florida is bordered by Georgia and ), some insurers have declined to renew existing policies or accept new business. If the magnitude of disaster losses in the U.S. continues to increase,(2) more and more tax practitioners will be called on to aid clients in maximizing the tax benefits of a disaster loss deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. (DLD DLD Dihydrolipoamide Dehydrogenase (deficiency) DLD Domestic Long Distance DLD Digital Lifestyle Device DLD Deutsche Linux Distribution DLD Developmental Language Disorder DLD Don't Look Down (band) ). Sec. 165(i)(1) defines a disaster loss as ". . . any loss attributable to a disaster occurring in an area subsequently determined by the President of the United States The head of the Executive Branch, one of the three branches of the federal government. The U.S. Constitution sets relatively strict requirements about who may serve as president and for how long. to warrant assistance by the Federal Government under the Disaster Relief and Emergency Assistance Act...." The tax treatment of disaster losses differs from the treatment of other casualty losses. While casualty losses are deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). in the year of occurrence, disaster losses can be deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. (at the taxpayer's election) in either the year of occurrence or the previous tax year. This choice gives taxpayers the opportunity to obtain tax refunds Tax refund Money back from the government when too much tax has been paid or withheld from a salary. more quickly; the rapid infusion of cash into a damaged community helps it to begin the rebuilding process. The possibility of a quick tax refund is attractive for taxpayers suffering the cash demands stemming from a disaster. However, the Sec. 165(i)(1) election to deduct de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. a disaster loss in the year preceding the loss year may result in a greater total tax than if the election had not been made. Often, the appropriate year to claim a disaster loss is not obvious; it can be affected by (among other things) the difference in tax rates between long-term capital gain Long-term capital gain A profit on the sale of a security or mutual fund share that has been held for more than one year. and ordinary income, the treatment of net operating losses Net operating losses Losses that a firm can take advantage of to reduce taxes. (NOLs), and, for individuals, the various adjusted gross income (AGI (Artificial General Intelligence) A machine intelligence that resembles that of a human being. Considered impossible by many, most artificial intelligence (AI) research, projects and products deal with specific applications such as industrial robots, playing chess, ) limits and thresholds. This article illustrates the complexity inherent in deciding the proper year to claim a DLD, highlights some of the tax issues that complicate com·pli·cate tr. & intr.v. com·pli·cat·ed, com·pli·cat·ing, com·pli·cates 1. To make or become complex or perplexing. 2. To twist or become twisted together. adj. 1. the choice and explains how to ensure the maximum tax benefit. Computing computing - computer the DLD Generally, the magnitude of the DLD depends on the decline in the asset's fair market value (FMV FMV - full-motion video ) resulting from the disaster. A qualified appraiser A person selected or appointed by a competent authority or an interested party to evaluate the financial worth of property. Appraisers are frequently appointed in probate and condemnation proceedings and are also used by banks and real estate concerns to determine the market can estimate a property's FMV after the disaster.(3) However, the asset's FMV immediately before the disaster may be difficult to determine, especially if the property was acquired many years before the loss year and there have been no comparable purchases or sales in the recent past. It may be advisable ad·vis·a·ble adj. Worthy of being recommended or suggested; prudent. ad·vis  a·bil for taxpayers to obtain periodic appraisals (or make detailed video
records) of significant assets.The computation Computation is a general term for any type of information processing that can be represented mathematically. This includes phenomena ranging from simple calculations to human thinking. of the DLD hinges Hinges may refer to:
Trade/Business, Rental and Royalty Property If the property is owned by a corporation or used by an individual in a trade or business including for the production of rents or royalties), the DLD equals the "property loss" less any amount recovered or recoverable (e.g., an insurance reimbursement Reimbursement Payment made to someone for out-of-pocket expenses has incurred. ). If the asset is completely destroyed, the property loss is the asset's adjusted basis; if the asset is merely damaged, the property loss is the lesser of (1) the decrease in the asset's FMV attributable to the disaster or (2) the asset's adjusted basis. The DLD is reported on Form 4684, Casualties and Thefts, Section B, and, for individuals, carried to Form 1040, Line 14, as an "above the line" deduction. For C corporations, the DLD is carried to Form 4797, Sale of Business Property, if that form is otherwise being filed; if not, the DLD flows to Form 1120, Line 9, on which "From Form 4684" should be written. Investment Property Investment property is property that produces income (e.g., interest and dividends) or is held with the expectation it will appreciate in value. Investment property differs from business property in that the income generated does not require a high level of taxpayer participation. For this purpose, investment property excludes property that produces rents or royalties. Generally, a disaster can affect only tangible investment In contrast to stocks, bonds, and real estate (see equity investment), tangible investments are objects; there is a wide variety, including:
A DLD on property held by an individual for investment purposes is calculated in the same manner as a DLD on business property, and is also reported on Form 4684, Section B. However, the deduction is a miscellaneous itemized deduction Itemized Deduction A deduction from a taxpayer's taxable adjusted gross income that is made up of deductions for money spent on certain goods and services throughout the year. (Schedule A, Line 22), rather than above the line. A C corporation taxpayer takes an investment property loss in the same manner as a business property loss. If the investment property is a capital asset, the corporation can deduct the capital loss only to the extent of its capital gains. Personal Use Property If the affected asset is personal use property, the DLD is computed differently. First, regardless of whether the asset is destroyed or only damaged, the property loss is the lesser of (1) the decrease in the asset's FMV attributable to the disaster or (2) the asset's adjusted basis. Second, the potential DLD is reduced by (1) a $100 de minimis An abbreviated form of the Latin Maxim de minimis non curat lex, "the law cares not for small things." A legal doctrine by which a court refuses to consider trifling matters. threshold that applies on a per-casualty basis (e.g., if five assets are damaged in a tornado tornado, dark, funnel-shaped cloud containing violently rotating air that develops below a heavy cumulonimbus cloud mass and extends toward the earth. The funnel twists about, rises and falls, and where it reaches the earth causes great destruction. , the $100 reduction applies once to the entire loss); and (2) a 10%-of-AGI threshold that applies to the total net property loss for the year. Example 1: In 1997, X suffered a flood in Verb 1. flood in - arrive in great numbers arrive, come, get - reach a destination; arrive by movement or progress; "She arrived home at 7 o'clock"; "She didn't get to Chicago until after midnight" April, a tornado in June June: see month. and a hurricane in September September: see month. , causing disaster losses of $5,100, $7,600 and $10,100), respectively. X's 1997 AGI is $100,000 and he received $2,000 in insurance proceeds from the disasters. X's DLD is $10,500 (the $22,800 property loss ($5,100 + $7,600 + $10,100) - $2,000 (insurance) - $300 (de minimis reduction) - $10,000 (10% of 1997 AGI)); it is reported on Form 4684, Section A, and flows to Form 1040, Schedule A, Line 22. What is a "Disaster?" An event may be a casualty," but it is not a "disaster" in the absence of a Presidential declaration. Only a loss suffered in a Presidentially declared disaster area qualifies for the Sec. 165(i)(1) election, and only if the loss results from said disaster. Example 2: County K is a Presidentially declared disaster area in 1997 due to flooding. Y's house in K is unaffected by the flood, but is damaged in a fire in 1997. Y may be able to claim a casualty loss for such damage on his 1997 return, but cannot elect under Sec. 165(i)(1) to claim the DLD on his 1996 return. Further, the property loss must be due to actual physical damage caused by the disaster. Example 3: A tornado damages several houses in a neighborhood, decreasing the values of nearby (undamaged) houses. The owners of the undamaged homes have not suffered a disaster loss. An exception applies under Sec. 162(k) if the disaster causes an area to be unsafe and the residents are ordered to relocate re·lo·cate v. re·lo·cat·ed, re·lo·cat·ing, re·lo·cates v.tr. To move to or establish in a new place: relocated the business. v.intr. . In such case, even an owner of an unharmed residence in the unsafe area can claim a DLD. Example 4: A mudslide destroys some of the houses in neighborhood Z, causing the President to declare it a disaster area; other homes in Z are undamaged. The local government determines the mudslide has put Z at a materially increased risk of future damage and condemns the remaining houses in Z. The owners of the undamaged but condemned con·demn tr.v. con·demned, con·demn·ing, con·demns 1. To express strong disapproval of: condemned the needless waste of food. 2. homes can claim DLDs. A disaster can trigger a gain if the insurance recovery exceeds the property's adjusted basis. Gain recognition can often be deferred under Sec. 1033, dealing with involuntary involuntary adj. or adv. without intent, will, or choice. Participation in a crime is involuntary if forced by immediate threat to life or health of oneself or one's loved ones, and will result in dismissal or acquittal. INVOLUNTARY. conversions; however, the taxpayer must recognize the gain currently if he does not plan to replace the asset. Alternatively, the taxpayer may decide to forgo a Sec. 1033 election to defer de·fer 1 v. de·ferred, de·fer·ring, de·fers v.tr. 1. To put off; postpone. 2. To postpone the induction of (one eligible for the military draft). v.intr. the gain; in either case, the determination of the DLD becomes significantly more complex if there are both recognized disaster gains and losses. The Sec. 165(i)(1) election applies only to recognized losses Recognized Loss The amount of loss reported for income tax purposes. Notes: You can defer recognizing some losses and then deduct the losses for the following year(s). , not to gains. Making the Election Regs. Sec. 1. 165-1 1 (e) provides that a taxpayer claims a Sec. 165(i)(1) disaster loss in the year preceding the loss year by filing a return (if one has not yet been filed), an amended return Amended Return A return filed in order to make corrections to a tax return from a previous year. It can be used to correct errors and claim a more advantageous filing. Notes: An amended return is filed using Form 1040X. or refund TO REFUND. To pay back by the party who has received it, to the party who has paid it, money which ought not to have been paid. 2. On a deficiency of assets, executors and administrators cum testamento annexo, are entitled to have refunded to them legacies claim for the year preceding the loss year and clearly indicating that a Sec. 165(i)(1) election is being made. The return should specify the date(s) of the disaster and the city, town, county and state in which the destroyed or damaged property was located at the time of the disaster. The election must be made by the later of (1) the unextended due date of the return for the loss year or (2) the extended due date of the return for the tax year immediately preceding the loss year. (Generally, (1) will be the later of the two dates.) The election becomes irrevocable Unable to cancel or recall; that which is unalterable or irreversible. IRREVOCABLE. That which cannot be revoked. 2. A will may at all times be revoked by the same person who made it, he having a disposing mind; but the moment the testator is 90 days after it is filed. Sec. 165(i)(2) provides that the disaster is treated as having occurred in the year for which the DLD is claimed. Election Complexity Examples 5-11 illustrate the complexity of the election decision. Examples 5 and 6 involve a corporate taxpayer; Examples 7-11 involve individuals. Corporate Taxpayer Example 5: W corporation, a calendar-year taxpayer, sustained a $100,000 disaster loss in 1996. W's taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. before considering the loss) was $190,000 in 1995 and $240,000 in 1996. The chart below shows the effect of taking the $100,000 DLD in either year. Total taxes for 1995 and 1996 will be $500 higher if the Sec. 165(i)(1) election is made to deduct the loss in 1995; this stems from the fact that W's marginal tax rate Marginal Tax Rate The amount of tax paid on an additional dollar of income. As income rises, so does the tax rate. Notes: Many believe this discourages business investment because you are taking away the incentive to work harder. for 1995 and 1996 is 39%, but drops to 34% in 1995 if the DLD is claimed for that year. Corporate DLD
Claim DLD in 1996 Claim DLD in 1995
1995 1996 1995 1996
Pre-loss income $190,000 $240,000 $190,000 $240,000
DLD 0 (100,000) (100,000) 0
Taxable income $19O,000 $140,000 $90,000 $240,000
Tax $57,350 $37,850 $18,850 $76,850
Total 1995 and
1996 taxes $95,200 $95,700
Tax savings from
claiming DLD
in 1996 $500
1996 amounts
discounted at 3% $57,350 $36,748 18,850 $74,612
Total taxes for
1995 and 1996 $94,098 $93,462
Tax savings from
claiming DLD
in 1995 $636
An election to deduct the loss for 1995 will accelerate the receipt of tax savings, but, typically, the taxpayer will have to make the Sec. 165 (i) (1) election before the end of the tax year in which the loss occurred. The taxpayer must weigh whether to claim a quick refund with less than full tax information about the loss year or delay the refund and gain certainty about the loss year. Factors to consider in making this decision are the point in the tax year at which the loss occurred, the predictability of income and deductions for the loss year and the magnitude of the loss. Examples 5-11 discount the 1996 tax effects using a 3% discount rate (the six-month rate on US. Treasury bins). If, in Example 5, W makes a Sec. 165 (i) (1) election, it may realize the tax savings as much as 12 months earlier than if it had waited to deduct the loss for 1996. However, the length o time between receipt of the 1995 and 1996 tax benefits could be much shorter if the disaster occurred late in 1996 or if waited for information about the 1996 tax year. In Example 5, W saves $500 in taxes by deducting the loss in 1996; if the tax effects are discounted, W saves more ($636) by deducting the loss in 1995. W's marginal tax rates before and after the deduction strongly influence the decision whether to make the Sec. 165(i)(1) election. In general, if anticipates that the total effect of the election will be fairly small before discounting, it will be more advantageous to make the election and accelerate receipt of the benefit. Example 6. The facts are the same as in Example 5, except that W's pre-disaster loss income is $330,000 in 1995 and $450,000 in 1996. As illustrated below, the undiscounted savings by deducting the loss in 1995 is $5,000, because W is in a relatively higher marginal tax bracket Tax Bracket The rate at which an individual is taxed due to a particular income level. Notes: Each income class is taxed at a different level. Generally, the more you make the more you are taxed. (39%) that year, even though its income is lower than in 1996, due to the "bubble A bit in bubble memory or a symbol in a bubble chart. " in the corporate tax rate structure. This example shows that W cannot maximize its tax savings simply by choosing deduct the loss in the year with the higher pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta income. Corporate DLD
Claim DLD in 1996 Claim DLD in 1995
1995 1996 1995 1996
Pre-loss income $330,000 $450,000 $330,000 $450,000
DLD 0 (100,000) (100,000) 0
Taxable income $330,000 $350,000 230,000 $450,000
Tax $111,950 $119,000 $72,950 $153,000
Total 1995 and
1996 taxes $230,950 $225,950
Tax savings from
claiming DLD
in 1995 $5,000
1996 amounts
discounted at 3% $111,950 $115,54 $72,950 $148,544
Total 1995 and
1996 taxes $227,484 $221,494
Tax savings from
claiming DLD
in 1995 $5,990
Individual Taxpayer In Examples 7-11, H and W file married filing jointly Married Filing Jointly A filing status for married couples that have wed before the end of the tax year. They can record their respective incomes, exemptions and deductions on the same tax return. Married filing jointly is best if only one spouse has a significant income. and have two dependents. Before considering their 1996 disaster loss, H's and W's AGI was $300,000 in 1995 and $250,000 in 1996; their itemized deductions for each year were $60,000. Example 7: H and W experienced a $100,000 business disaster loss in 1996. As shown below, they will save $3,932 by electing to deduct the loss in 1995; the savings increase to $4,964 after discounting. Individuals With Business DLD
Claim DLD in 1996 Claim DLD in 1995
1995 1996 1995 1996
Pre-loss AGI $300,000 $250,000 $300,000 $250,000
Business DLD 0 (100,000) (100,000) 0
AGI $300,000 $150,000 $200,000 $250,000
Itemized deductions $54,441 $59,039 $57,441 $56,039
Personal exemptions 0 10,200 7,600 4,080
Taxable income $245,559 80,761 $134,959 $189,881
Tax $73,324 $17,400 $33,940 $52,852
Total 1995 and
1996 taxes $90,724 $86,792
Tax savings from
claiming DLD
in 1995 $3,932
1996 amounts
discountedat 3% $73,324 $16,893 $33,940 $51,313
Total 1995 and
1996 taxes $90,217 $85,253
Tax savings from
claiming DLD
in 1995 $4,964
Because a business disaster loss is deductible above the line, itemized deductions and personal exemptions Personal exemption Amount of money a taxpayer can exclude from personal income for each member of the household in calculation of a tax obligation. personal exemption See exemption. are affected by the choice of the year to deduct the loss. In Example 7, itemized deductions and personal exemptions are limited due to H's and W's relatively high AGI; when AGI is reduced by the DLD, more of the deductions and exemptions are allowed. By deducting the loss in 1995 (the higher income year), H and W receive a greater benefit; the loss allows for higher itemized deductions and personal exemptions and a reduction in their marginal tax rate from 36% to 31%. Example 8: The facts are the same as in Example 7, except that the property is personal use property. As illustrated on page 650, on an undiscounted basis, the overall tax liability for 1995 and 1996 is higher if the DLD is claimed in 1995, because the benefit of claiming the DLD in the higher income year (1 995, when H and W are in a higher tax bracket) is offset by the 10%-of-AGI and $100 de minimis reductions. However, on a discounted basis, greater tax savings arise from claiming the DLD in 1995. Individuals With Personal DLD
Claim DLD in 1996 Claim DLD in 1995
1995 1996 1995 1996
AGI $300,000 $250,000 $300,000 $250,000
Itemized deductions:
Other $54,441 $56,039 $54,441 $56,039
DLD 74,900 69,900
Personal exemptions 0 4,080 0 4,080
Taxable income $245,559 $114,981 $175,656 $189,881
Tax $73,324 $27,524 $48,160 $52,852
Total 1995 and
1996 taxes $100,848 $101,012
Tax savings from
claiming DLD
in 1996 $164
1996 amounts
discounted at 3% $73,324 $26,722 $48,160 $51,313
Total 1995 and
1996 taxes $100,046 $99,473
Tax savings
from claiming
DLD in 1995 $573
Example 9: The facts are the same as in Example 8, except that $50,000 of H's and W's 1995 AGI consists of long-term capital gain. The change in the composition of the taxpayers' income makes it preferable to claim the DLD in 1996; they save $1,061 (undiscounted) over the two years ($324, when discounted). Individuals With Capital Gain and Personal DID
Claim DLD in 1996 Claim DLD in 1995
1995 1996 1995 1996
Ordinary
income $250,000 $250,000 $250,000 $250,000
Capital gain 50,000 0 50,000 0
AGI $300,000 $250,000 $300,000 $250,000
Itemized deductions:
Other $54,441 $56,039 $54,441 $56,039
DLD 74,900 69,900
Personal exemptions 0 4,080 0 4,080
Taxable income $245,559 $114,981 $175,659 $189,881
Tax $69,324 $27,524 $45,057 $52,852
Total 1995 md
1996 taxes $96,848 $97,909
Tax savings from
claiming DLD
in 199 $1,061
1996 amounts
discounted at 3% $69,324 $26,722 $45,057 $51,313
Total 1995 md 1996
taxes $96,046 $96,370
Tax savings from
claiming DLD in 1996 $324
Examples 7-9 demonstrate that the Sec. 165(i)(1) election decision is far more complex than simply identifying the year with the highest pre-DLD income. The optimal year to claim the DLD depends on the nature of the property affected business, investment or personal use), the nature of the taxpayer's income, the applicable tax rates, the phaseouts of personal exemptions md itemized deductions and the discount rate used. The Effect of NOLs Calculating the tax benefit of a Sec. 165(i)(1) election becomes even more difficult when the DLD is sufficiently large In mathematics, the phrase sufficiently large is used in contexts such as:
adj. 1. Unrelated to business or industry. 2. Unrelated to one's own business or employment. property; the deduction is not limited to the amount of nonbusiness income. Example 10: H and W file married filing jointly; they suffered a $700,000 business disaster loss in 1996. Without considering the disaster loss, their AGI (consisting entirely of ordinary income) and itemized deductions for 1992-1996 were as follows: Year AGI Itemized deductions 1992 $250,000 $60,000 1993 $250,000 $60,000 1994 $250,000 $60,000 1995 $300,000 $60,000 1996 $250,000 $60,000 Individuals With NOL-Creating Business DLD
Claim DLD in 1996 Claim DLD in 1995
1995 1996 1995 1996
Pre-loss AGI $300,000 $250,000 $300,000 $250,000
Business DLD 0 (700,000) (700,000) 0
AGI $300,000 (450,000) (400,000) $250,000
Itemized deductions $54,441 $60,000 $60,000 $56,039
Personal exemptions 0 10,200 10,000 4,080
Taxable income $245,559 $(520,200) $(470,000) $189,881
Tax $73,324 $0 $0 $52,852
Refunds from
NOL carryback:
1992 $52,256
1993 $54,374 $54,374
1994 $53,998 $4,514
1995 $24,500
Total tax (refund) $73,324 $(132,872) $(111,144) $52,852
Net cash inflow
for 1995 md 1996 $59,548 $58,292
Tax savings from
claiming DLD
in 1996 $1,256
Total tax refund)(*) $73,324 $(129,002) $(111,144) $51,313
Net cash inflow
for 1995 and 1996(*) $55,678 $59,831
Tax savings from
claiming DLD in 1995 $4,153
(*) 1996 amounts discounted at 3%. As seen in the chart accompanying Example 10, claiming the DLD in 1995 generates a $400,000 NOL(4) that can be carried back to trigger refunds for 1992 and 1993 and a partial refund for 1994; a 1996 DLD results in a carryback carryback n. in taxation accounting, using a current tax year's deductions, business losses or credits to refigure and amend a previously filed tax return to reduce the tax liability. (See: carryover) triggering full refunds for 1993 and 1994 and a partial refund for 1995.(5) On an undiscounted basis, the combined net cash inflow in·flow n. 1. The act or process of flowing in or into: an inflow of water; an inflow of information. 2. for 1995 and 1996 is greater if the DLD is claimed in 1996; but after discounting, the advantage shifts to claiming the DLD in 1995. If the DLD is taken in 1995, the NOL carryback to 1992 reopens a closed tax year. Ordinarily or·di·nar·i·ly adv. 1. As a general rule; usually: ordinarily home by six. 2. In the commonplace or usual manner: ordinarily dressed pedestrians on the street. , tax years are closed three years after the later of the unextended due date or the filing date of the return. Although the tax year is technically reopened by the NOL carryback and refund claim, the Service can subsequently assess additional tax only to the extent of the refund.(6) Some taxpayers may find reopening Reopening Treasury offerings of additional amounts of outstanding issues, rather than an entirely new issue. A reopened issue will always have the same maturity date, CUSIP number, and interest rate as the original issue. a closed tax year to be advantageous; others may wish to leave closed years alone. Example 11:the facts are the same as in Example 10, except that the loss is a personal use property disaster loss. The DLD is an itemized deduction reduced by $100 and 10% of AGI, generating a smaller NOL carryback. The greater tax benefits arise if the DLD is taken in 1995. Individuals With NOL-Creating Personal DLD
Claim DLD in 1996 Claim DLD in 1995
1995 1996 1995 1996
Pre-loss AGI $300,000 $250,000 $300,000 $250,000
Itemized deductions:
Other $54,441 $56,039 $54,441 $56,039
674,900 669,900
Personal exemptions 0 4,080 0 4,080
Taxable income $245,559 $(485,019) $(424,341) $189,881
Tax $73,324 $0 $52,852
Refunds from
NOL carryback:
1992 $52,256
1993 $54,374 $53,618
1994 $53,998
1995 $14,473
Total tax (refund) $73,324 $(122,845) $(105,874) $52,852
Net cash inflow for
1995 and 1996 $49,521 $53,022
Tax savings from
claiming DLD
in 1995 $3,501
Total tax refund)(*) $73,324 $(119,267) $(105,874) $51,313
Net cash inflow for
for 1995 and 1996(*) $45,943 $54,561
Tax savings from
claiming DLD
in 1995 $8,618
(*) 1996 amounts discounted at 3%. Year-End year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. Planning It can be difficult to choose the proper year in which to claim a DLD if the tax facts regarding the loss year are not yet available (i.e., the composition of gross income, the applicable tax rates and, for individuals, pre-loss AGI and itemized deductions). If a disaster loss were to occur early in the tax year, a Sec. 165(i)(1) election at that time might be premature. Because the Sec. 165(i)(1) election can be revoked within 90 days of its filing, if possible, a taxpayer should wait until near the end of the tax year in which the disaster occurs before deciding whether to make a Sec. 165 (i) (1) election. Example 12: S, an individual, suffers a disaster loss in May 1997. His 1996 return was filed in March 1997. In December 1997, S has a complete picture of his 1997 income and deductions and concludes he should claim the DLD for 1996. S files an amended a·mend v. a·mend·ed, a·mend·ing, a·mends v.tr. 1. To change for the better; improve: amended the earlier proposal so as to make it more comprehensive. 2. 1996 return on Dec. 20,1997 and receives a refund. In early March 1998, S realizes that there would be a greater tax benefit if the DLD were taken on his 1997 return (not yet filed). S has until March 19, 1998 to revoke To annul or make void by recalling or taking back; to cancel, rescind, repeal, or reverse. revoke v. to annul or cancel an act, particularly a statement, document, or promise, as if it no longer existed. the Sec. 165(i)(1) election by filing another amended return for 1996 that excludes the DLD and repaying the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. the refund. Regs. Sec. 1. 1 65-1 1 (e) provides that the revocation The recall of some power or authority that has been granted. Revocation by the act of a party is intentional and voluntary, such as when a person cancels a Power of Attorney that he has given or a will that he has written. is not effective unless any credit or refund stemming from the election is paid back to the IRS within the revocation period. However, if the election is revoked before the taxpayer receives the refund, the revocation is effective if the refund is repaid within 30 calendar days after receipt. Sec. 9100 Relief Taxpayers who fail to make a timely Sec. 165(i)(1) election may be granted an extension of time to file from the Service. Regs. Sec. 301.9100-1(a) gives the IRS the discretion, on the taxpayer's showing of good cause, to grant an extension to make a Sec. 165(i)(1) election. Such relief is available only if (1) the time for making the election is not expressly prescribed pre·scribe v. pre·scribed, pre·scrib·ing, pre·scribes v.tr. 1. To set down as a rule or guide; enjoin. See Synonyms at dictate. 2. To order the use of (a medicine or other treatment). by statute; (2) the extension request is filed before the time fixed by regulation for making the election or within a reasonable period thereafter; and (3) it is demonstrated to the IRS's satisfaction that the granting of the extension will not jeopardize jeop·ard·ize tr.v. jeop·ard·ized, jeop·ard·iz·ing, jeop·ard·izes To expose to loss or injury; imperil. See Synonyms at endanger. the government's interests. Because the time for making a Sec. 165(i)(1) election is specified in Regs. Sec. 1. 165-1 1 and is not expressly prescribed by statute, it is possible to make a "late" Sec. 165 (i) (1) election under Regs. Sec. 301.9100-1 if the taxpayer can show good cause. The IRS generally will use the facts and circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or of each situation to determine whether good cause for granting an extension time has been shown md the other requirements" of Regs. Sec. 301.9100-1 have been met.(7) The IRS has permitted a late Sec. 165(i)(1) election when the taxpayer has shown a lack of awareness of the ability to claim the DLD for the tax year prior to its occurrence. Administrative relief can be granted even if the return was prepared by a CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , provided the CPA was unaware of the availability of the election, and so states in the extension request.(8) It may be difficult for a CPA to admit ignorance in a written document filed with the IRS; however, the admission may save significant tax dollars for a client. Sec. 9100 relief was granted to a taxpayer whose CPA had advised her about die election, but had misinterpreted the time frame within which the election had to be made. The late election was allowed because die CPA submitted an affidavit affidavit Written statement made voluntarily, confirmed by the oath or affirmation of the party making it, and signed before an officer empowered to administer such oaths. that she had mistakenly mis·tak·en v. Past participle of mistake. adj. 1. Wrong or incorrect in opinion, understanding, or perception. 2. Based on error; wrong: a mistaken view of the situation. interpreted Regs. Sec. 1. 165-11.(9) In another instance, a Sec. 165(i)(1) election was allowed even though it was made almost five months after the deadline.(10) A tax professional had advised his client about the Sec. 165(i)(1) election, but not about the deadline. The tax professional submitted an affidavit stating that he did not know the date by which the election had to be made. Further, both the taxpayer and the tax professional stated that they could not have made the election any sooner because they did not know the magnitude of the loss. It may be risky to assume that not knowing the size of a disaster loss is sufficient cause for an extension of time under Regs. Sec. 301.9100-1. When the size of a disaster loss is unknown, the safest course would be to request an extension of time to make the Sec. 165 (i) (1) election well before the deadline. If the extension is not granted before the deadline, the taxpayer should make the best possible estimate of the loss under the circumstances, and make a timely Sec. 165(i)(1) election with a statement attached explaining the estimated nature of the loss. Conclusion This article demonstrates the complexity in determining the proper year to deduct a disaster loss. For both corporate and individual taxpayers, many factors interact in making the election decision. A practitioner should consider the taxpayer's situation carefully and compute To perform mathematical operations or general computer processing. For an explanation of "The 3 C's," or how the computer processes data, see computer. die tax under each alternative year. A taxpayer dealing with a disaster loss is faced with a tradeoff between claiming a quick refund versus waiting for full tax information about the loss year. On the one hand, the time value of money will tend to favor making the Sec. 165(i)(1) election. If the undiscounted numbers indicate that the election is beneficial, the discounted figures will always reinforce that decision. If the undiscounted calculations favor forgoing for·go also fore·go tr.v. for·went , for·gone , for·go·ing, for·goes To abstain from; relinquish: unwilling to forgo dessert. the election and deducting the loss in the year incurred, the result may change after discounting. On the other hand, for taxpayers who do not need a quick refund, a useful planning strategy may be to wait until near the end of the loss year to make the election decision; at that time, most of the loss-year tax facts will be known or can be accurately estimated, resulting in the more beneficial tax decision. (1) Howard, "Storm Losses Seen A Continuing Industry Threat," 99 National Underwriter underwriter n. a company or person which/who underwrites an insurance policy, issue of corporate securities, business, or project. (See: underwrite) UNDERWRITER, insurances. One who signs a policy of insurance, by which he becomes an insurer. 19 (5/8/95). (2) U. S. disaster losses were $22 billion in 1992, $16 billion in 1994 and $8.3 billion in 1995; see Farinella, "Losses Surged in 1994 to $16 Billion," 96 Best's Review (Property/Casualty) 18 (Dec. 1995); "Fourth Qtr. Cas. Loss Hits Record at $2.6 Billion," 100 National Underwriter 8 (1/22/96). (3) According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the Taxpayer Relief Act of 1997 (TRA TRA Training TRA Transfer TRA Transition TRA Tennessee Regulatory Authority TRA Telecommunications Regulatory Authority (Oman) TRA Tax Reform Act (1976, 1984, or 1986) TRA Teachers Retirement Association '97) Section 912(a), amending Sec. 165(1)(4), effective Aug. 5, 1997, under guidance to be prescribed, an appraisal made for the purpose of obtaining a Federal loan or loan guarantee as a result of a Presidentially declared disaster can be used to establish the amount of a disaster loss. (4) TRA '97 Section) 1082(b), adding Sec. 172(b)(1)(F), effective for tax years beginning after Aug. 5, 1997, retains the three-year carryback (and 15-year carryforward carryforward 1. A business operating loss that, for tax purposes, may be claimed a certain number of years in the future, often up to 15 years. ) period for NOLs attributable to (1) casualty losses of individuals and (2) Presidentially declared disaster losses of small or farming businesses. In Examples 10 and 11, the NOLS are calculated on the assumption that H and W have neither nonbusiness income nor employee related itemized deductions. (The presence of either would further complicate those examples.) For simplicity, it is assumed that none of the itemized deductions in the carryback years are subject to AGI based floors (e.g., medical expenses or miscellaneous itemized deductions). (5) Alternatively, H and 14'could choose to forgo the NOL carryback if their gross income in the carryback years includes significant capital gains and they anticipate that future years' income will include relatively more ordinary income. (6) See James G. Maxcy, 59 TC 716 (1973). (7) See IRS Letter Ruling 9622020 (2/28/96). (8) See IRS Letter Ruling 9534016 (5/26/95). (9) See IRS Letter Ruling 9603024 (10/20/95). (10) See IRS Letter Ruling 9603023 (10/20/95). |
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