AboutMike Wellman Expertise I was a former Manager with Price Waterhouse, now PricewaterhouseCoopers, the largest accounting firm in the world. I have had clients in almost every industry and of every size.
I will only answer questions dealing with IRS problems such as delinquent tax returns, Offers in Compromise (Tax Settlement), IRS collection matters including installment agreements, liens, levies, seizures, audits, appeals, innocent spouse claims and injured spouse claims. All other will be referred to the question pool.
Experience Over 25 years experience in taxation specializing in IRS collections, examinations and appeals.
Publications New York Times, Wall Street Journal, Your Money.
Education/Credentials BBA, Baylor University.
Awards and Honors IRSOS.com won the Knowledgeweb award for educational excellence for content.
Expert: Mike Wellman Date: 1/24/2008 Subject: insurance reimbursements taxable?
Question QUESTION: Our condo suffered interior water damage. Our homeowners Ins issued a check to us less the deductible. We paid a cleanup contractor with that.
The Condo Associations Insurance Company paid the Condo Assn for the rest of the estimated damage. A restoration contractor we hired was paid a materials deposit by the Condo Assn. But, then he wanted 4 installments. The Condo Association wouldn't give him the rest until the work was done. Therefore, we paid him personal checks in his personal name (not the business name) for the portion of the work he was supposed to do.
When the work was done the Condo Association issued us a check for the balance of the insurance funds and we will return the installment amount that we paid the contractor. Since we did the painting portion and other work that was needed to be done ourselves we will deduct that amount that the insurance company allowed.
The contractor says that we must send him the money so he can pay taxes on it because we were a “subcontractor.” Should we have to pay taxes on that portion that is considered “reimbursement for damages to our home?”
ANSWER: You would not have to report the insurance payments unless you were claiming a casualty loss - and the insurance proceeds would be used to reduce the loss - or you were paid more than the repairs cost.
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QUESTION: It is the contractor that is claiming that because he submitted a proposal for the entire job originally then he has to pay taxes on that full amount even though we changed our minds and decided to do certain work ourselves. We are saying; "No, you only have to pay taxes on the amount you received from the Condo Assoc. and the amount that we issued personal check to you for." Who is correct here?
Answer He only pays taxes on money he received. If he is an accrual basis taxpayer (unlikely) and he declared it all as income - that violates Generally Accepted Accounting Principles. They will need to adjust revenue on their books. They do not pay tax on bid amounts - only on received amounts.
