Disaster Area - Casualty Losses

Does anyone have experience with Federal Disaster areas and casualty losses?

My hometown of Paradise CA was destroyed by the CA Wildfires and I have friends and family reaching out for help. One particular client had an investment property (not a home residence or rental) that was partially destroyed. They expect the insurance payout will not cover all of the damages so they will be in a casualty loss situation.

Question: Because it is a federal disaster, they can claim the losses in 2017 (Temporary Reg. §1.165-11T), but what happens if the losses generate an NOL? As I understand it, a casualty loss NOL goes back 3 years... should I file a protective claim for refund to secure the statute for 2016? How does this work?

Any help is much appreciated!

-Damon

If the NOL originated in 2018 it can only be carried back if it is from a farming activity (or if you are an insurance company). All we have is carry forward now and can only offset 80% of income. Even for a disaster.

Yes but does the 2018 rules apply to an amended 2017 return? Its my understanding that the NOL will be created in 2017 and should be handled accordingly, much like the AGI limitation being calculated based on 2017 AGI and not based on 2018 AGI.

It's treated as a 2017 loss. See section 165(i)(2).

(2) Year of loss
If an election is made under this subsection, the casualty resulting in the loss shall be treated for purposes of this title as having occurred in the taxable year for which the deduction is claimed.

Question: Because it is a federal disaster, they can claim the losses in 2017 (Temporary Reg. §1.165-11T), but what happens if the losses generate an NOL? As I understand it, a casualty loss NOL goes back 3 years... should I file a protective claim for refund to secure the statute for 2016? How does this work?

Pub 536 tells you that you can use either Form 1045, or Form 1040X (for each year). "You can get your refund faster by using Form 1045, but you have a shorter time to file it. You can use Form 1045 to apply an NOL to all carryback years. If you use Form 1040X, you must use a separate Form 1040X for each carryback year to which you apply the NOL."

You will not need to file a "protective claim". "Generally, file Form 1040X for the carryback year within 3 years after the due date, including extensions, for filing the return for the NOL year. For example, if you are a calendar year taxpayer, you must generally file a claim for refund because of an NOL carryback from 2015 by April 15, 2019 (3 years after the due date for the NOL return)." This tells me you have until sometime in 2021 to file the amendments.

California did not change its rules, but I'm not sure if they were in complete conformity even before TCJA. See FTB Publication 1034 Disaster Loss How to Claim a State Tax Deduction.

Here is an additional description of the overall situation for 2018.

"Important Observation for 2018 Disasters and NOLs: For years beginning after 12/31/17, TCJA 2017 only allows a carry forward for NOLs—no carryback. Additionally, TCJA 2017 only allows an NOL which is carried forward from a previous year, to reduce taxable income in the carry forward year by 80%. As such, victims of the January 2018 Southern California Mudslides and the Carr Fire in Shasta County will be subject to this new tax reform provision regarding NOLs if the 2018 disaster loss is reported on the 2018 tax return, instead of the 2017 tax return. If an NOL results from the disaster loss calculated on the 2018 return, it will not be eligible for carryback to 2015 as under former law. In this situation, if the throwback election is made, and the 2018 mudslide disaster loss is reported on the 2017 tax return instead, resulting in an NOL on the 2017 tax return, the 2018 disaster loss reported on the 2017 tax return utilizing the throwback election would be eligible for the now-repealed 3-year carryback provision and can be carried back to tax years 2014, 2015 and 2016."

(Ms. Mulak is a respected practitioner based in southern CA, whose seminars I have attended regularly over the years).

Much appreciated!