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Tax Cuts and Jobs Act

IRS clarifies: safe harbor for concrete foundation repairs unaffected by TCJA’s loss limitations

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Letter from Charles Rettig to Rep. Courtney

In a letter to Rep. Joe Courtney (D-CT), IRS Commissioner Charles Rettig clarified that changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017) to the treatment of casualty losses and net operating losses (NOLs) do not affect safe harbor relief granted by IRS that allows certain taxpayers to treat costs of repairing home foundations damaged by pyrrhotite as casualty losses.

Background—pyrrhotite damage and safe harbor. Residents in the northeastern part of the U.S. have experienced problems with certain residential concrete foundations that contain pyrrhotite, which can cause concrete to deteriorate prematurely.

In 2017, IRS provided a safe harbor that allowed taxpayers to treat the costs of repairing such damage as a casualty loss and contained a formula for determining the amount of the loss. (Rev Proc 2017-60, 2017-50 IRB 559; see “Mineral pyrrhotite damage to home’s concrete foundation treated as deductible casualty“) To claim  a casualty loss under the safe harbor in Rev Proc 2017-60, a taxpayer was generally required to have paid to repair damage caused by a deteriorating concrete foundation before Jan. 1, 2018.

In 2018,  IRS modified Rev Proc 2017-60 to extend the time for individual taxpayers to pay to repair the damage to their personal residences. (Rev Proc 2018-14, 2018-9 IRB 378; see “IRS extends safe harbor for taxpayers with pyrrhotite damage to home foundations“) As modified, a taxpayer could qualify for the safe harbor and take a 2017 casualty loss if, for damage occurring prior to 2018, he or she pays to repair the damage prior to the last day for filing a timely amended return for the 2017 tax year.

Background—casualty losses and NOLs. Under pre-TCJA law,  individuals could claim as itemized deductions certain personal casualty losses, not compensated by insurance or otherwise, including losses arising from fire, storm, shipwreck, or other casualty, or from theft. There were two limitations to qualify for a deduction: (1) a loss had to exceed $100, and (2) aggregate losses could be deducted only to the extent they exceeded 10% of adjusted gross income.

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the TCJA suspended the personal casualty loss deduction, except for personal casualty losses incurred in a Federally-declared disaster. (Code Sec. 165(h))

Under pre-TCJA law, NOLs could be carried back two years and forward 20 years and could offset 100% of a taxpayer’s taxable income in the carryback or carryover years.

For tax years beginning after Dec. 31, 2017, the 2-year carryback provision is repealed, NOLs can be carried forward indefinitely, and the NOL deduction is generally limited to 80% of taxable income (determined without regard to the NOL deduction, itself). (Code Sec. 172(a)Code Sec. 172(b))

Request for clarification. Rep. Courtney requested clarification as to (i) how the TCJA changes impact casualty loss deductions under Rev Proc 2017-60 and Rev Proc 2018-14, and (ii) whether the deductions can generate or increase an NOL.

No effect. In his letter, IRS Commissioner Rettig stated that casualty loss deductions that qualify for the safe harbor under Rev Proc 2017-60 and Rev Proc 2018-14 are treated as trade or business deductions and can create or increase a taxpayer’s NOL. A taxpayer can carry these NOLs back two years and forward 20 years, and the NOLs can offset 100% of the taxpayer’s taxable income in those years.

The letter clarified that NOLs from casualty losses meeting the requirements of Rev Proc 2017-60 and Rev Proc 2018-14 are treated as arising either in or before the 2017 tax year and are thus unaffected by the TCJA’s limitations on casualty losses and NOLs starting in the 2018 tax year.

References: For casualty losses, see FTC 2d/FIN ¶ C-7214United States Tax Reporter ¶ 1654.300.

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