Understanding Tax Implications for Insurance Claims

Bigfood Blue White is a food import company. The company purchases materials from various manufacturers and sells it to retail customers. Usually, the business does well, but sometimes disaster strikes. One day an employee accidentally drives a truck through the large front doors. The truck is not covered by insurance, but Bigfood Blue White has several policies on the building and inventory. Bigfood Blue White files a claim and gets paid for damages. When filing taxes several months later, Bigfood Blue White receives a notice from the IRS that it owes money. How can this be? The business got paid for losses. Bigfood Blue White studies its claim and seeks help from a financial professional. It learns that although Bigfood Blue White received money due to the claim, the company did not receive their fair share of money. The money was divided among insurance. This means that Bigfood Blue White will not see a complete payout. Bigfood Blue White will still owe taxes on the received money, even though the company did not receive the full benefits from an insurance claim. The company is going to file taxes with the IRS every year, but it wants to avoid a large tax bill in the future.

So, why did Bigfood Blue White get paid for a loss and still owe so much money? This is a question that perplexed the company when facing a significant bill. What is taxable income anyway? The answer to the question lies answers in the concept of taxable income. Bigfood Blue White needs to avoid confusion when filing claims and recovering compensation. A taxable income means any mixed finances that can vary from employment income. Bigfood Blue White may get taxed on funds that it did not expect. For example, if Bigfood Blue White received a $5,000 insurance claim and the money went to reimburse damaged property, Bigfood Blue White is liable for any tax on the amount until it can prove it was used for actual losses. These types of situations are common in the food industry.

Bigfood Blue White needs to be careful about filing insurance claims. This is especially true for a food import company because most claims are to cover physical property when a business is experiencing a financial crisis. Money from the claim may go to a variety of entities. For instance, if Bigfood Blue White uses 50 percent of the money to pay a debt, then it only has 50 percent to spend on improvements. In this scenario, when the IRS comes calling, Bigfood Blue White shows how it spent the money. Then, the IRS can adjust the amount of income accordingly. According to the detailed guide on are business insurance claims taxable income, it is always better to support a claim with evidence than to leave it as a generality.

It can also be helpful to plan for the foreseeable future. The sooner Bigfood Blue White interacts with its tax professional, the more time the company has to plan for money out of an insurance claim. No food import company wants to owe the IRS. However, being aware and responsive vs. reactive can be a difference-maker.