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"Tax Treatment of Proceeds from Business Interruption Insurance"
Louis S. Nunes, III
Jones Walker E*Bulletin
October 27, 2005

This article addresses the tax treatment of proceeds of business interruption insurance policies.  Although each individual insurance policy will need to be examined, for purposes of this article, it is assumed that the insurance proceeds are paid as a result of loss of profits for an operating business and NOT for the loss or destruction of property. Depending on the policy language,  there might be different tax considerations.  How a particular policy calculates the BI lost income payment may have an impact on how the insured handles the determination of the adjusted gross income. Different tax rules would address insurance proceeds received for the loss of property.

IRC section 61 defines gross income as all income from whatever source derived.  The general rule is that any accession to wealth must be included in taxable income unless the IRS provides a specific exclusion.  There is no exclusion for proceeds received for lost income under a business interruption policy.

In addition, because such proceeds compensate for income that would otherwise be taxable income, the proceeds are taxable.   The inclusion of these proceeds in a company's gross income does not necessarily result in tax.  Most companies will continue to incur expenses, which may exceed the company's income (including the insurance proceeds) for the year.  The proceeds are merely reported as an item of ordinary income on a company's tax return.

IRS Circular 230 Disclaimer:

Pursuant to Treasury guidelines, any tax advice contained in this communication (or any attachment) does not constitute a formal opinion. Accordingly, any tax advice contained in this communication (or any attachment) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be asserted by the Internal Revenue Service.