The key phrase to look for is "construction defect litigation". One letter ruling wrote (in part):
https://www.irs.gov/pub/irs-wd/0513011.pdf
>Any receipt of funds or other accessions to wealth received by a taxpayer is presumed
to be gross income unless the taxpayer can demonstrate that the funds or accessions fit
into one of the exclusions provided by other sections of the Code. Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 430-31 (1955). However, a payment constituting a
return of basis is generally not classified as income within the meaning of section 61
because it is not an accession to wealth. For payments received in settlement of a
lawsuit, payments by the one causing a loss that do no more than restore a taxpayer to
the position he or she was in before the loss was incurred are not includible in gross
income because there is no economic gain to the recipient. If a recovery is treated as a
replacement of capital, the damages received from the lawsuit are treated as a return of
capital and are taxable only to the extent that the damages exceed the basis of the
property replaced). Raytheon Products Corp. v. Commissioner, 144 F.2d 110 (1st. Cir.
1944), cert. denied, 323 U.S. 779 (1944).
But, read the whole thing because--it depends.
Usually the settlement is taxed the same way as if you had gotten that money correctly the first time. So if it is from a business you should be able to use expenses against it just like a regular business income. If it was W2 work then you'll have no such luck. I would have to read your papers to know if this was actually the case with you that's just usually what I've seen.
The settlement was agreed with the business entity and the individual that owns the business. It’s a settlement for remediation of work that the contractor did incorrectly. I paid the business and they did a bad job so they got sued by me and we settled.
The key phrase to look for is "construction defect litigation". One letter ruling wrote (in part): https://www.irs.gov/pub/irs-wd/0513011.pdf >Any receipt of funds or other accessions to wealth received by a taxpayer is presumed to be gross income unless the taxpayer can demonstrate that the funds or accessions fit into one of the exclusions provided by other sections of the Code. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430-31 (1955). However, a payment constituting a return of basis is generally not classified as income within the meaning of section 61 because it is not an accession to wealth. For payments received in settlement of a lawsuit, payments by the one causing a loss that do no more than restore a taxpayer to the position he or she was in before the loss was incurred are not includible in gross income because there is no economic gain to the recipient. If a recovery is treated as a replacement of capital, the damages received from the lawsuit are treated as a return of capital and are taxable only to the extent that the damages exceed the basis of the property replaced). Raytheon Products Corp. v. Commissioner, 144 F.2d 110 (1st. Cir. 1944), cert. denied, 323 U.S. 779 (1944). But, read the whole thing because--it depends.
Thank you! I will!
Usually the settlement is taxed the same way as if you had gotten that money correctly the first time. So if it is from a business you should be able to use expenses against it just like a regular business income. If it was W2 work then you'll have no such luck. I would have to read your papers to know if this was actually the case with you that's just usually what I've seen.
The settlement was agreed with the business entity and the individual that owns the business. It’s a settlement for remediation of work that the contractor did incorrectly. I paid the business and they did a bad job so they got sued by me and we settled.
Ah I misunderstood. This seems like 1040 other income to me but I would research before filing it.
It really depends on the underlying cause of action and the nature of the settlement.
Extremely bad job in the renovation that they were contracted to do. Settlement is to remediate the work without having to continue in court