tax benefit rule

tax benefit rule

A rule that if one receives a tax benefit from an item in a prior year because of a deduction, such as for an uninsured casualty loss or a bad debt write-off, and then recovers the money in a subsequent year,the money must be counted as income in the subsequent year.

Example: Acme Inc. suffers a fire a few days after completion of a building that cost $500,000 to build. The building is a total loss. Acme's insurance company refuses to pay the claim, suspecting arson. Acme writes off the $500,000 loss as an expense on its taxes and sues the insurance company. Five years later Acme wins the lawsuit and receives an award of $500,000. The money must be reported as income because it was expensed in the earlier year. If it had never been written off, it would not be income when the judgment was recovered.

Tax Benefit Rule

A rule that provides that the amount of an expense recovered must be included in income in the year of the recovery to the extent the original expense resulted in a tax benefit. The most common example is a state income tax refund of tax deducted in the prior year.
References in periodicals archive ?
The rules also contain a tax benefit rule, whereby the amount of an erroneous item allocated to a requesting spouse may be increased or decreased depending upon the tax benefit to each spouse.
41) The Board agreed with Collins's argument, (42) but the Court of Appeals for the Eighth Circuit reversed on the ground that the tax benefit rule was an uncodified equitable doctrine.
Future recoveries will result in additional deductions or in gross income under the tax benefit rule.
One common source that is frequently overlooked by tax advisors, and more often misunderstood, is the application of the tax benefit rule (IRC section 111) to state and local tax refunds.
Moreover, the tax benefit rule does not require the refund be taken into income because the amount refunded was never deducted under California law.
Explain how the Department applies the tax benefit rule in the following situation:
If the insurance reimbursement is more than was expected, the excess may have to be reported as income under the tax benefit rule.
However, a policy dividend can be included in income in full under the tax benefit rule.
They argued that following the tax benefit rule, the refunds were not includible in income because under New York law the credits were labeled as overpayments of state income tax, and they had not taken a deduction for state income tax paid in the preceding year on their income tax return for any of the years.
Under the tax benefit rule, some or all of an employer's deductions in an earlier year may have to be included in income in a later year if an event occurs that is fundamentally inconsistent with the premise on which the deduction was based.
Shorter represents a line of cases which indicate that New York tax law adheres to the tax benefit rule.