On June 25, 2010 the Internal Revenue Service provided guidance to those individuals and businesses affected by the oil spill in the Gulf of Mexico. Here is a very brief overview of the current law.
The law requires that a taxpayer include in gross income payments the taxpayer receives for lost business income, lost wages, or lost profits. This income may also be taxable for self-employment tax. However, how the income is structured determines the taxability. Is it made by an employer or by any employer/employee obligation? Be prepared. Know whether or not you will be receiving a 1099 Misc or a W-2 at the end of the year.
Generally, payments the taxpayer receives for property damage or destruction in not included in gross income as long as the payments do not exceed the taxpayer’s adjusted basis in the damaged or destroyed property. Should there be a gain, the tax can be deferred if replacement property is purchased and later sold. If the payments are less (including insurance reimbursements) the taxpayer may have a deductible casualty loss.
However, gross income payments received for personal physical injuries or physical sickness (not emotional distress) is generally not taxable.
Every person has unique financial circumstances. Be sure you understand your tax obligation as it relates to payments from BP.