A hurricane peels the roof off your storefront in March. A wildfire takes out three rental cabins in July. A derecho flattens your grain bins in October. By the time the adjusters leave and the insurance check clears, you have a mountain of receipts, a half-rebuilt building, and roughly zero cash.
Here is the part that most people miss: you do not have to wait until you file next April to get a tax refund on the loss. There is a switch buried in the Internal Revenue Code that lets you treat a disaster that happened this year as if it happened last year — and amend the return you already filed. Done correctly, the refund check can hit your bank account in weeks, not months.
That switch is the Section 165(i) election, and it is one of the most underused tax tools available to anyone hit by a federally declared disaster. Here is how it works, when it pays off, and where the trapdoors are hidden.
What a "Disaster Loss" Actually Means in 2026
The casualty loss rules went through a major reshuffle under the Tax Cuts and Jobs Act in 2017, and again under the One Big Beautiful Bill Act starting January 1, 2026. As of the 2026 tax year, there are three flavors of casualty loss you need to keep straight, because each one comes with different math:
Federal casualty losses. Personal-use property damaged in a presidentially declared federal disaster area. Subject to a $100-per-event reduction and a 10%-of-AGI threshold. You still have to itemize to claim them.
Disaster losses. Losses (personal or business) that occur in a county designated for individual or public assistance. These are eligible for the Section 165(i) election. Same $100 floor and 10% AGI haircut for the personal-use slice.
Qualified disaster losses. A more generous bucket created by various disaster-relief acts. The $100 floor jumps to $500, the 10% AGI threshold disappears, and you can claim the deduction on top of the standard deduction — no itemizing required. Coverage now extends through disasters declared between January 1, 2020 and September 2, 2025, and the OBBBA permanently expanded the disaster category to include certain state-declared disasters starting January 1, 2026.
Business property — inventory, equipment, real estate, vehicles — plays by friendlier rules. There is no $100 floor and no 10% AGI haircut on the business side; you deduct the loss as an ordinary business expense or a Section 1231 loss, depending on the property type.
What Section 165(i) Actually Does
Section 165(i) of the Internal Revenue Code lets you elect to treat a disaster loss that occurred in the current taxable year as if it had occurred in the preceding taxable year. You file an amended return for the prior year (or claim it on the prior-year original return if you have not filed yet), and the loss gets applied against income you have already reported.
Three reasons people make this election:
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Cash flow. A refund on last year's return is processed in roughly 8 to 16 weeks. Waiting until you file this year's return — which you cannot do until early next year — can mean a year or more between writing the rebuild check and seeing the deduction back. When you are floating an SBA disaster loan, that matters.
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Bracket arbitrage. If you had a bumper year in the prior tax year and a bad year this year, the deduction is worth more applied against the prior-year income. A $250,000 disaster loss against $400,000 of prior-year income at a 35% marginal rate is worth substantially more than the same loss against $80,000 of current-year income at 22%.
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AGI threshold mechanics. The 10%-of-AGI floor on personal-use casualty losses is calculated separately for each year. If the prior year's AGI was significantly lower than the current year's, more of the loss survives the haircut.
The election is not automatic. You have to affirmatively make it, and there is a deadline.
The Six-Month Deadline Nobody Talks About
Under Treas. Reg. § 1.165-11, the election must be made by the date that is six months after the original due date of the return for the disaster year, determined without regard to any extension of time to file.
Worked example: a calendar-year individual taxpayer suffers a hurricane loss in August 2026. The 2026 return is normally due April 15, 2027. The Section 165(i) election deadline is October 15, 2027 — six months after April 15, 2027 — regardless of whether you filed an extension.
Miss that deadline and the election is gone forever. You can still claim the loss, but only on the original disaster-year return — no acceleration.
You also get a 90-day revocation window. If you make the election and then realize the prior-year application is worse than the disaster-year application, you can revoke within 90 days of the original election due date.
Filing Mechanics, Step by Step
The procedural side trips up more taxpayers than the substantive math. Here is the sequence:
Step 1: Confirm the disaster qualifies. The IRS publishes a running list of FEMA-declared disasters at irs.gov/newsroom/tax-relief-in-disaster-situations. The disaster must have been declared by the President for federal assistance, or — starting in 2026 — qualify as a state-declared disaster meeting the new statutory criteria. The county where your property sat at the time of the loss must appear on the declaration.
Step 2: Calculate the loss. Use the smaller of (a) the adjusted basis of the property immediately before the casualty or (b) the decrease in fair market value caused by the casualty. From that amount, subtract any insurance or other reimbursement you received or expect to receive. The result is your raw loss before floors and thresholds.
Step 3: Prepare Form 4684. Casualties and Thefts is the workhorse form. Personal-use property goes on Section A; business and income-producing property goes on Section B. If you are electing under Section 165(i) on an amended return, write the name or description of the disaster, the state where the property was located, and "Section 165(i) Election" across the top of Form 4684. Provide a brief statement with:
- The name or description of the disaster
- The date or dates of the disaster
- The address (city, town, county, parish, state, ZIP) where the damaged property was located at the time of the disaster
Step 4: File the amended return. Individuals file Form 1040-X. C corporations file Form 1120-X. Partnerships file an Administrative Adjustment Request or amended Form 1065 depending on whether they are BBA-electing. Attach the Form 4684 and the election statement.
Step 5: Watch for the previously-deducted-loss trap. You cannot claim the same loss in two places. If you have already deducted the loss as a Schedule C expense, cost of goods sold, or any other line item on the disaster-year return, you must first file an amended disaster-year return removing that deduction before or simultaneously with the Section 165(i) election. This is the most common audit trigger in this whole area.
Calculation Mechanics in Practice
A worked example helps. Maria runs a small bakery in Asheville, North Carolina. In September 2026, a hurricane floods her shop. Numbers:
- Building adjusted basis: $180,000
- Decrease in FMV from the flood: $220,000
- Insurance reimbursement: $140,000
- Equipment adjusted basis: $35,000 (fully destroyed, FMV before = basis)
- Insurance on equipment: $20,000
The building loss is the lesser of basis ($180,000) or FMV decrease ($220,000), reduced by insurance: $180,000 − $140,000 = $40,000. The equipment loss is $35,000 − $20,000 = $15,000. Total business casualty loss: $55,000.
Because this is business property, no $100 floor and no 10% AGI threshold apply. The full $55,000 flows through.
Maria's 2025 net business income was $190,000. Her 2026 income, even with disaster-recovery contracts, is projected at $90,000. By electing under Section 165(i), the $55,000 disaster loss applies against 2025 income. At her 2025 marginal rate of 32%, the deduction is worth roughly $17,600 — refunded by the IRS within a few months. Applying the same loss against 2026 income at 22% would have been worth only about $12,100.
Net benefit of the election: approximately $5,500 in additional tax savings, plus the time value of getting the refund a full year earlier.
When the Election Is the Wrong Move
It is not always a winner. Skip the election when:
- The prior year was a loss year. Applying additional deductions to a year that already showed a net operating loss just enlarges an NOL carryforward; you get no immediate refund and you may run into Section 461(l) excess business loss limitations or Section 382 issues if you have had an ownership change.
- The current year is a higher-income year. Reverse-bracket arbitrage. If you booked a giant gain from selling a building or a chunk of stock in the disaster year, deducting the loss against that current-year income is worth more.
- AMT is in play. Casualty losses interact with the alternative minimum tax in ways that can erode the value of the deduction. Run the numbers both ways.
- You are very close to the six-month deadline and the amended return is complex. A botched amended return can trigger an audit of the prior-year return on issues unrelated to the disaster.
Recordkeeping Will Make or Break Your Claim
Casualty loss audits are detail-heavy. The IRS will want to see:
- Pre-disaster documentation. Photos, appraisals, purchase invoices, depreciation schedules. If you do not have a pre-disaster baseline, the agent's eyebrow goes up.
- Post-disaster documentation. Adjusters' reports, repair estimates, photos of the damage, contractor invoices.
- Insurance correspondence. Claim filings, denial letters, settlement statements. The "expected reimbursement" rule is unforgiving — if you reasonably expect to receive insurance proceeds, you must reduce the loss by that amount even if the check has not arrived.
- FEMA disaster declaration printout. A copy showing your county is covered.
- Basis records for every asset. This is where small businesses fall apart. If you bought a piece of equipment a decade ago and lost the receipt, reconstructing basis becomes guesswork — and guesswork loses on audit.
The recordkeeping problem is also where plain-text accounting earns its keep. A clean, version-controlled ledger with every asset purchase, every depreciation entry, and every repair tagged to a specific account makes the post-disaster reconstruction trivial. You can hand the auditor a printout, a chain of git commits, and a Form 4684 worksheet that ties to the penny.
Common Mistakes That Cost Refunds
Patterns from years of disaster-loss audits:
- Claiming the diminished-value-only loss. A car that loses $5,000 of resale value because it was once flooded but still drives is not a $5,000 casualty loss. The decrease in FMV is measured by physical damage, not stigma.
- Double-counting business losses. Deducting damaged inventory through cost of goods sold and on Form 4684. Pick one lane.
- Forgetting to reduce by expected insurance. Even when the insurance fight is ongoing, you must reduce the loss by what you reasonably expect to collect. If the recovery later falls through, you take an additional deduction in the year it becomes clear.
- Ignoring gain recognition. If insurance proceeds exceed the adjusted basis of the property, you have a gain, not a loss. Section 1033 lets you defer it by reinvesting in similar property within two years (four years for certain disasters), but you have to elect that too.
- Missing the state declaration's nuance. Starting in 2026, certain state-declared disasters qualify — but the state declaration alone is not enough. The Treasury Secretary must also recognize the disaster for federal tax purposes under the OBBBA framework. Verify before relying on a governor's proclamation.
- Using the wrong tax year for the disaster. "Sustained" generally means the year the casualty occurred, but for theft losses it is the year of discovery and for losses with ongoing insurance disputes it can be the year of reasonable certainty.
Plain-Text Recordkeeping Pays Off Disproportionately
Disasters are not the time to discover that your records are a black box. The taxpayers who get the cleanest, fastest refunds under Section 165(i) are the ones who already had a maintained basis schedule, a transparent ledger, and a documented chain of asset acquisitions before anything went wrong. The cost of that discipline is small; the payoff during an emergency is enormous.
Keep Your Books Disaster-Ready
When a disaster hits, the difference between a clean Section 165(i) claim and a stalled audit comes down to recordkeeping you set up before the storm. Beancount.io provides plain-text, version-controlled accounting that gives you an auditable history of every asset, every depreciation entry, and every repair — exactly what you will need to reconstruct basis and substantiate a casualty loss. Get started for free and keep your financial trail intact for the worst day you hope never comes.