If your business has been forced to shut down operations due to an unforeseen event, such as a natural disaster or forced government closure, this will most certainly have a negative financial impact on your and your workers. However, many business owners obtain business interruption insurance to help them cover costs in the event a major shutdown in operations occurs. At Bentley & More LLP, our California business interruption insurance lawyers are here to help if you have questions about your coverage. Here, we want to discuss whether or not business interruption insurance compensation is taxable. As COVID-19 continues to devastate businesses in California and the US, it is vitally important to understand all aspects of business interruption insurance.
A brief explanation of business interruption insurance
Business interruption insurance policies cover the loss of income that businesses suffer after a disaster. This is not the same thing as insurance used to rebuild property destruction, but rather it is used to cover:
- profits that would have been earned under normal operating conditions
- fixed costs still incurred on the property
- a temporary location
- commissions and training cost of new equipment
- and more
Understanding whether or not this is taxable
In general, the IRS says any accession of wealth must be included as taxable income. There is no exclusion for proceeds received for lost income through a business interruption policy. Typically, business interruption insurance is used to compensate for income that would have otherwise been earned and taxed. Therefore, this compensation is generally taxable.
However, taxed business interruption insurance payments may be offset by business casualty losses that could be tax-deductible, to the extent that those losses are not already covered by some type of insurance. In order to support a deduction, the taxpayer needs to be able to document or explain the loss and prove it was caused by the event that led to the business disruption.
This is different from property replacement
Insurance proceeds received for loss of property are generally not taxable if the proceeds are used to replace the lost property or make repairs. However, business interruption insurance is not used to cover this type of loss. Replacement or repair of destroyed property is covered by a different type of business insurance policy. Business interruption insurance is usually an “add-on” to insurance policies. It is not part of the standard insurance plan.
Our attorneys can help you through this today
Please understand that nothing in this article is meant to be taken as formal tax advice, and we strongly advise that you speak to your accountant about this topic as soon as possible. Different tax rules apply to the different types of insurance you may be using after a loss of business due to a disaster.
When you have questions about your business interruption insurance, you need to seek assistance from a skilled business interruption insurance attorney as soon as possible. At Bentley & More LLP, our Orange County personal injury attorneys will investigate your business loss claims and work to ensure you receive the compensation you are entitled to. COVID-19 has altered the way businesses in the US and California operate, so understanding how this insurance will be taxed is vital. When you need a California business interruption insurance attorney, you can contact us for a free consultation by clicking here.