If receive a payment from an insurance company for damages, it is only taxable if it is for more than your cost basis.
Your cost basis is what you originally paid, plus the cost of permanent improvements, minus any depreciation you claimed for business use.
- For example, you bought a car for $20,000, it was totaled, and you received $15,000 present value as damages. Not taxable.
- You bought a car for $20,000, it was totaled, and you received $25,000 in replacement cost coverage. $5000 is taxable.
- You bought a car for $20,000, and used it in business and claimed $10,000 of depreciation. It was totaled and you received $15,000 present value as damages. Because your adjusted cost basis is reduced by depreciation, your basis is now $10,000, so $5000 is business income.
