Can I deduct the cost of repairs/replacement I payed to offset the 1099MISC box 3 as other income from a private company for reimbursement for property damage? How?

[cher2bj]

I received a check from a pipeline company as compensation for polluting my private lake.  All the fish were killed and the lake will require refurbishing before fish can be introduced back into the lake.

How do I deduct the cost of the fish and refurbishing of my lake?

[KrisD · Accepted solution]

According to the IRS:

"Property settlements for loss in value of property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return. However, you must reduce your basis in the property by the amount of the settlement.

If the property settlement exceeds your adjusted basis in the property, the excess is income. For more information, see the Instructions for Schedule D, (Form 1040) Capital Gains and Losses and the Instructions for Form 4797, Sales of Business Property."

https://www.irs.gov/pub/irs-pdf/p4345.pdf

This means you must subtract the amount of damage from the basis in the property. If the award is larger than your basis, the difference would be income. 

First enter the 1099-MISC.

Next, make the adjustment for the damage:

Click on Federal,,,Wages & Income,,,,scroll down to the last section "Less Common Income"

Scroll down to the last choice "Miscellaneous Income, 1099-A 1099-C" and Start

Scroll down to the last choice "Other reportable income" and Start

For the Description enter "Reduction in basis of damaged property"

Enter the amount of the award that you are attributing to the damage AS A NEGATIVE NUMBER

(remember that you are also reducing the basis in your property by this amount. 

Click Continue and Done

The 1099-MISC and your adjustment will show on Schedule 1 line 21 and flow to the 1040.