Insurance Settlement for Business

[Super Mom]

I have a Schedule C client with a rented storefront and a car came through the building, resulting in a payout from the car's insurance company to my client for loss of use, repairs, etc. I haven't researched this much yet. My first thought "insurance settlements aren't taxable" but since this is a business not so sure about that.

I saw the thing in the taxbook about casualty and theft loss and the insurance settlement must be subtracted to arrive at that. This TP doesn't want to do that, just would rather not have to show settlement, won't show any expenses from it and be done with it. Can we do that?

Thanks in advance for any help from people with experience in this!!!

[Super Mom]

at the very least, I'm sure she wouldn't include in cost of goods sold the amounts to replace items that the insurance paid for, right?

[Super Mom]

at the very least, I'm sure she wouldn't include in cost of goods sold the amounts to replace items that the insurance paid for, right?

Wait, I'm rethinking that now. She keeps inventory, therefore, she did not get a deduction for items unsold as of the accident, so that should not be a consideration either.

[spanel]

I have a Schedule C client with a rented storefront and a car came through the building, resulting in a payout from the car's insurance company to my client for loss of use, repairs, etc. I haven't researched this much yet. My first thought "insurance settlements aren't taxable" but since this is a business not so sure about that.

I saw the thing in the taxbook about casualty and theft loss and the insurance settlement must be subtracted to arrive at that. This TP doesn't want to do that, just would rather not have to show settlement, won't show any expenses from it and be done with it. Can we do that?

Thanks in advance for any help from people with experience in this!!!

Its income, plain and simple. Replace the items damaged and deduct those. Anything left over is profit.

Chris

[Gretel]

Its income, plain and simple. Replace the items damaged and deduct those. Anything left over is profit.

Chris

Wow, how do you arrive at this answer not knowing if leasehold improvements or furniture & equipment is involved. If so, unless the basis is zero already there is not income for these items.

[Super Mom]

I do not see how it is profit when the client used the money to restore the building to previous condition.

[Super Mom]

Wow, how do you arrive at this answer not knowing if leasehold improvements or furniture & equipment is involved. If so, unless the basis is zero already there is not income for these items.

No leashold improvements are involved, there was some old furniture not being depreciated that was destroyed. I do not fully understand why, but my client used the money to restore the store to previous condition even though it was rented.

[Super Mom]

No leashold improvements are involved, there was some old furniture not being depreciated that was destroyed. I do not fully understand why, but my client used the money to restore the store to previous condition even though it was rented.

I just called the client for clarification. She DID NOT restore the building, the owner's did that, her settlement was for product (never deducted because unsold) and for tables, cabinets etc.... The tables and cabinets etc... where all very old and were inherited from her father. They also paid her some money for loss of use that I'm sure costed her income. The insurance adjuster assured my client that this was non taxable and that they send out no tax payment forms to the IRS or anyone. This was actually paid by the insurance on the car that came into the building NOT my clients insurance.

I want to see some actual tax law on this, the taxbook has nothing that I can find, and I have been unsuccessful thus far searching the internet and IRS.gov.

Thanks for any help!

[spanel]

I just called the client for clarification. She DID NOT restore the building, the owner's did that, her settlement was for product (never deducted because unsold) and for tables, cabinets etc.... The tables and cabinets etc... where all very old and were inherited from her father. They also paid her some money for loss of use that I'm sure costed her income. The insurance adjuster assured my client that this was non taxable and that they send out no tax payment forms to the IRS or anyone. This was actually paid by the insurance on the car that came into the building NOT my clients insurance.

I want to see some actual tax law on this, the taxbook has nothing that I can find, and I have been unsuccessful thus far searching the internet and IRS.gov.

Thanks for any help!

Again I fail to see how this is not income to the business? This is not personal items that were lost, they where business items. If it was for product as you say, remove them from inventory and add the reimbursement to income. How can someone pay you for Lost income and you not turn that in as income?!?!

Chris

[Super Mom]

Again I fail to see how this is not income to the business? This is not personal items that were lost, they where business items. If it was for product as you say, remove them from inventory and add the reimbursement to income. How can someone pay you for Lost income and you not turn that in as income?!?!

Chris

I see how the payment for loss of use would be income maybe, the products will be a wash when replaced so not really an issue, but the counters etc.. that were old and inherited were never deducted by her as business assets so not seeing why those items would be taxable. Regardless, it really doesn't matter what either of us thinks, it only matters what the tax code says and I have found NOTHING!! Hoping someone can guide me in finding that!!

[Lion]

I think when you work through the business casualty loss form -- including the insurance receipts -- you'll have your answer. Use the instructions to link you to the tax code.

The furniture/fixtures she inherited were at FMV on DOD, right? Inventory leads to ordinary income.

If you don't get a profit/income, then go through it again. If it were me, I'd look for a local mentor who's an expert at theft & casualty losses, because I haven't done one except in classes. Meaning, I'd put it on extension to give me time to research, have my work looked over by an expert.

[mactoolsix]

I see how the payment for loss of use would be income maybe, the products will be a wash when replaced so not really an issue, but the counters etc.. that were old and inherited were never deducted by her as business assets so not seeing why those items would be taxable. Regardless, it really doesn't matter what either of us thinks, it only matters what the tax code says and I have found NOTHING!! Hoping someone can guide me in finding that!!

Let's look at it logically (not saying tax law is ever logical . . . )

She started with business assets of say inventory cost of $20,000; possibly a months income of $2,000; old inherited cabinets & counters basis of zero.
Any destroyed inventory was replaced, so no gain or loss.
Her $2,000 lost income was replaced, so no gain or loss.
She ended up with new cabinets and counters.

From the IRS https://www.irs.gov/businesses/small...ins-and-losses

"Gains on Casualty Losses

If you receive an insurance payment or other reimbursement in excess of the adjusted basis of damaged or destroyed property you will have a gain:

The gain is the amount received minus the adjusted basis in the property.

To defer the gain:

You must buy property specifically to replace the damaged or destroyed property in order to defer the gain.

The basis of the replacement property will be:

The adjusted basis of the property being replaced."

So, she had a gain - new cabinets.
But the gain will be deferred because she now has basis in the cabinets and counters which she didn't have before the accident.

I think the accident was benefit to her - hope nobody was injured.
Mike

[Super Mom]

I read this from the IRS pub THANK YOU!! I'm a little at question on figuring the "adjusted basis" on the replaced property, if insurance proceeds where enough to cover that adjusted basis would be 0 and no depreciation, right?

Let's look at it logically (not saying tax law is ever logical . . . )

She started with business assets of say inventory cost of $20,000; possibly a months income of $2,000; old inherited cabinets & counters basis of zero.
Any destroyed inventory was replaced, so no gain or loss.
Her $2,000 lost income was replaced, so no gain or loss.
She ended up with new cabinets and counters.

From the IRS https://www.irs.gov/businesses/small...ins-and-losses

"Gains on Casualty Losses

If you receive an insurance payment or other reimbursement in excess of the adjusted basis of damaged or destroyed property you will have a gain:

The gain is the amount received minus the adjusted basis in the property.

To defer the gain:

You must buy property specifically to replace the damaged or destroyed property in order to defer the gain.

The basis of the replacement property will be:

The adjusted basis of the property being replaced."

So, she had a gain - new cabinets.
But the gain will be deferred because she now has basis in the cabinets and counters which she didn't have before the accident.

I think the accident was benefit to her - hope nobody was injured.
Mike