Are COVID-19 business disaster losses tax deductible?

When disaster strikes, taxpayers face the potential for losses: loss of business, property, inventory, contracts, and capital expenditures, all of which amounts to a loss of income. Many disaster losses are physical—flooded buildings, destroyed products, crashed trucks—and may be tax-deductible.

But with tax filing deadlines on the horizon—delayed from April 15 to July 15 by the Internal Revenue Service due to coronavirus—and hurricane and wildfire seasons on the horizon, it's worth thinking about how disasters may affect your accounting.

What are casualty losses?

A casualty loss is defined as damage to or destruction of property due to a sudden, unexpected, or unusual event. Prior to the 2017 federal tax overhaul, taxpayers could deduct casualty losses of all kinds, including loss from theft, accidents, house fires, and other personal happenstance, as well as destruction due to large-scale disasters such as tornadoes and floods.

The new rules, to be in effect from 2018 to 2025, state that taxpayers can now only claim casualty losses if they arise from a federally declared disaster.

You can deduct qualified casualty losses in the year you sustain the loss, but you must reduce the loss by any salvage value or any insurance you receive or expect to receive. Any losses you deduct must reach 10% of your adjusted gross income (AGI) and must add up to more than the standard deduction to make claiming them worthwhile.

What are net operating losses?

Business owners who face disasters, including the coronavirus pandemic, are likely to sustain net operating losses (NOL). This means a company's allowable tax deductions are greater than its taxable income for a given tax period.

Taxpayers mitigate those losses via taxes through NOL carry-backs and carry-forwards, which are mechanisms that let you claim a percentage of a year's NOL in previous or future years. The 2017 tax act removed the ability to carry NOL back and limited NOL carry-forward to 80% per year. The new Coronavirus Aid, Relief, and Economic Security Act (CARES Act) changed that, allowing taxpayers to carry 100% of NOL backward or forwards.

Figuring out how to do this can get complicated, so it's best to work with a professional.

"Talk to a tax accountant about how to use an NOL because depending on your income or tax bracket, it might be good to carry it forward," says Luke Frye, a certified public accountant (CPA) and co-founder of Timber Tax Accounting.

How will the COVID-19 pandemic affect tax deductions?

The usual disaster tax deductions will not broadly apply to the COVID-19 pandemic because the virus doesn't damage property.

"This COVID-19 is terrible, but it's not against anyone's house, anyone's building," says Mulaney. "If you owned a stadium, it's not worthless, but it's not useable for the next few months. It's still usable in the future."

But just because it doesn't destroy buildings doesn't mean COVID-19 isn't devastating. Net operating losses are sure to be pronounced.

Taxpayers can mitigate NOLs through carry-forwards and carry-backs. So while the company that owns the stadium can't claim a loss of the stadium itself, it can claim the loss of income against past or future tax filings.

Writing off healthcare expenses

Those confronting disasters, including but not limited to coronavirus, may be faced with high medical bills as a result. Healthcare expenses can be tax-deductible, but total deductions for healthcare expenses must exceed 7.5% of your adjusted gross income in 2019 to be allowable.

So if your AGI was $50,000, you'd need to pay $3,750 in out-of-pocket medical expenses before you could claim them as a deduction. And even then, a standard deduction of $12,200 (for single filers) or $24,400 (for married filers) in 2019 is a high bar to reach with itemization.

Maximize your deductions

While taxes aren't the first thing you want to think about when faced with disaster, taking account of your losses and claiming whatever deduction you can is an essential part of recovery.

You or your business may be able to deduct casualty losses, and you may be able to mitigate your net operating losses through your tax filings.