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jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3159
Experience:  I've prepared all types of taxes since 1987.
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In 2005, my construction company had a loss of $250K that we

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In 2005, my construction company had a loss of $250K that we had to pay out. This past year, 2011, we got that money returned to our company. In 2011, when I received the money back, I paid off alot of bills, credit cards, etc. and settled with alot of creditors. I am not sure if I have to classify this money as income, or reimbursed expenses and if I paid off some personal bills with the money, does that count as personal income?

A bit more information is needed to know if this is or is not income subject to tax.

Why, or how, did the money get returned in 2011?
Usually deductions for expenses do not get returned six year later.

Was this income of the company that was not collected until 2011?

Was this insurance proceeds for a theft or casualty?

Is the company still in operation?
Is the company still in existence?

Are you the sole owner of the company?

What form of entity is the company? (Single member LLC/sole proprietor, corporation, partnership , etc)

How it will be classified depends on why it was received.

Customer: replied 4 years ago.

The money got returned by check. It was determined through arbitration (not judicial) that our company was actually not at fault and so all the money we paid in 2005 was repaid via a check back to our company to 2011.

No, this was not income. We had been going along on a construction job, getting monthly draws in 2005, when the owner felt we had purchased some materials that he did not authorize to be purchased with the funds he had given us already so he made us pay him for the materials. In 2011, through an internal arbitration process, it was determined our company was not at fault and these monies were returned to us as it was our money in the first place.

This was not insurance related.

The company still exists. My husband and I have an S corp; I am 51% owner and he is 49%.

Here was the process:

Our company received money from the owner to purchase materials and for labor. We purchased materials that he said we were not authorized to purchase with the money he had given us. At that point in 2005, we were made to pay him back the money $250K for those mateials. Then in 2011, it was finally determined that our company was not in the wrong for having purchased the materials and the $250K was paid back to us via a check to our company.

Hello again,

Presuming that the cost of materials was deducted in 2005 then the return of those costs does have to be counted as a reduction of material costs in 2011 for the company.

Technically it is not income but is a contra-expense. That is, it is a refund of expenses that were deducted. The result is the same whether it is listed as income or as a contra-expense since the income for the year will increase.

If for some reason these costs were not deducted in the past, they would not be included as a reduction of expenses when you got the check.

"Recovery of amount deducted (tax benefit rule). If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. If you have a recovery in a later year, include the recovered amount in income in that year. However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. "

To the extent that the amount was deducted previously to reduce income it will have to be included when recovered to increase income. Otherwise, you would get the benefit of deducting an amount that you eventually had been reimbursed and was not out of pocket.

Whether you used the reimbursement or not does not change that the company will include it to the extent it was deducted. Taking the money from the S corporation will mean that it will be shown as a distribution from the company to the shareholder; but that does not change having it increase the company income and the profit that will be passed to shareholders via the K-1 for 2011.

Please ask if you need clarification or have any further question.
Thank you.

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