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 partnership must recognize income 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.
Future recoveries will result in additional deductions or in gross income under the tax benefit rule.
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.
The loss should be shown net of any expected recovery from insurance companies or the Securities Investor Protection Corporation, as reconciled in future tax years under the tax benefit rule.
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.
Any remaining accrued interest (that was previously deducted) would be reported as ordinary income under the tax benefit rule (1180 East 63rd St.
However, in revenue ruling 93-75, the IRS took a new approach, stating in part, "If a taxpayer's itemized deductions in a prior taxable year were reduced by the overall deduction limitation in section 68(a) of the code and the taxpayer subsequently recovers all or a portion of these previously deducted amounts (for example, state income taxes), the recovery or refund is, in general, fully includable in gross income under the tax benefit rule.