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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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Accounting

This answer was rated:

I want to know how I am supposed to categorize insurance claim payment for a stolen business vehicle in quickbooks?


Stephen G :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.

Stephen G :

Are you going to replace the vehicle?

Stephen G :

If you have written off (expensed) the book value of the original vehicle, then the insurance reimbursement would reduce that expense. Any excess would either reduce the cost of the replacement vehicle or if the vehicle isn't replaced it would be recorded as other income.

Customer:

The vehicle is not replaced so the insurance reimbursement should be recorded as income and subject to be taxed?

Customer:

The vehicle is not replaced so the insurance reimbursement should be recorded as income and subject to be taxed?

Hello and thank you for your question.

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I am answering this because it appears to be more of an accounting question and I will address both the accounting and tax aspects (ie... accounting and tax experts are two different things where CPA means certified public accountant).

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The accounting is different for book and tax purposes. As a cash basis taxpayer, I assume you keep your books on what is truly a modified cash basis. This means you record fixed asset purchases, such as vehicles, on your company balance sheet and then proceed to write them off over time via depreciation adjustments (on the income statement) using an accumulated depreciation account (on the balance sheet).

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For book purposes, this is treated as a sale with the net gain or loss being shown as other income, below net income from operations, on your profit and loss. To make the entry in QuickBooks you do four things: 1) credit the fixed asset account for the original capitalized cost of the vehicle; 2) debit the accumulated depreciation account for the accumulated depreciation through the date of the loss; 3) debit cash for the insurance proceeds (or a receivable if the cash has yet to be received); 4) credit / debit the difference to other income as either a gain or loss on disposal.

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For tax purposes, you need to look at the history of the vehicle. Did you claim standard mileage in the past for one or more years? If so, you need to adjust your basis in the vehicle by the number of miles claimed. The basis adjustment depends on the year the miles were claimed (ie... basis reduction is 21 cents per mile for 2009, 23 cents for 2010, 22 cents for 2011, 23 cents for 2012). See Section 3 of IRS Notice 2012-72 and IRC 1016.

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Once you have your adjusted basis for tax purposes by looking at the prior years' allowable (not allowed, unless greater than allowable) depreciation adjustments, including any adjustments for use of the standard mileage rate as applicable, you are ready to calculate your gain or loss (IRC 1001). Your gain(loss) will be the difference between the insurance proceeds and your adjusted basis for tax purposes. See IRC 1, 1231, and 1245 for special rules in calculating the tax treatment of the disposition, as a portion of the gain, if any, may be ordinary income for tax purposes and a portion of the gain may be a capital gain taxed at a lower rate. See also IRC 165 for rules on losses.

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As a side note, depreciation should be recorded up until the date of the loss.

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As a second side note, if you are keeping your books on a pure cash basis, then the entire amount of the insurance proceeds should simply show as other income in your income statement. The vehicle would have already been expensed.

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As a final side note, if you have a loan on the vehicle that is repaid by you after the insurance proceeds are received (including if insurance proceeds are paid directly to your creditor), the above accounting and tax rules would not change. The repayment of the loan is a separate entry on your books. Make it after making the above entries.

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Thanks again for your question!

BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience: Owner of a CPA firm
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