by Bart Basi
Many people living and conducting business on the Gulf Coast have lost their jobs and incomes because of the oil rig explosion. In response, the federal government and BP have embarked on measures to reimburse victims and like any other time when money has been exchanged, the IRS has shown up with its guidance.
There are many people who have been put out of work over the Gulf oil spill and many are taking payments from BP to recover lost wages. Guidance issued by the IRS reminds the taxpayer those wages are still taxable despite the disaster, just as the income would have been taxed had the spill not happened at all.
Fishermen, tourist resorts, hotels, retailers and other businesses on the Gulf Coast are taking a beating with the loss of tourism, fishing and business. BP and the federal government are making payments for lost business income as well. Any payments made to the business must be reported as business income and reported on the applicable form per the entity requirements. Money received for lost income is still ordinary taxable income.
According to IRS guidance, any money received for damaged or lost property is subject to the tax rules that were in play previous to the oil spill. Specifically, money received for depreciable business property is not taxable to the extent of the adjusted basis in the property, or the purchase value minus depreciation taken. Any money beyond the adjusted basis is subject to tax as if the asset were sold.
If the taxpayer loses property to an involuntary conversion (meaning it was destroyed, stolen, condemned or disposed of under the threat of condemnation) and the taxpayer receives money for the item’s replacement, the taxpayer can purchase another asset and delay the tax requirements until the new asset is sold. Remember, this only applies if the money received is used to purchase a replacement asset. Any excess money is fully taxable.
The rules on casualty losses remain the same. If a person receives money for property that has been lost or damaged as a result of the spill, taxpayers can claim casualty losses to the extent of loss suffered. The loss is determined by taking the adjusted value of the asset and subtracting any payments made by BP or other insurer for the event. For instance, if an asset with an adjusted basis of $1 million is damaged and a reimbursement of $600,000 is settled upon, the taxpayer could potentially claim a casualty loss of $400,000, subject of course to the various other tax rules affecting the loss. Generally, fair market value must be determined by a qualified appraiser in order to substantiate such claims, if and when a challenge arises in the value and loss and something other than adjusted book value is used for the loss claimed.
While payments from BP and federal state governments are payments victims deserve for their losses, a lot of the payments made are still taxable as they would be had the spill not happened at all. It is advisable that when you or anyone you know is receiving payments from BP or the government, even if your payments are not related to the disaster, but are similar in nature, one must remember to pay the applicable taxes as required.
Please call the professionals at the Center for all your tax planning and business appraisal needs at 618.997.3436.