If I received a refund from the manufacturer of a faulty home improvement product, is that refund tax deductible? I spent $12,000 and received $8,000 back for warranty

[adam-burdell]

We purchased a new home a few years ago and spent $12,000 on new flooring. It failed and I requested a refund for the faulty flooring product to which the manufacturer paid $8,000 to me. Do I need to claim this as income if it is a refund of my money spent on the flooring? The company sent me a 1099, but not sure if I have to claim it or not.

[Vanessa A · Accepted solution]

No.  That refund is not taxable income. This was a refund to make you whole again and did not result in a gain so it would be treated similar to an insurance payout.   You will still need to enter the 1099 since you received it, but you will then remove the income so you are not taxed on it. 

To enter the 1099 Misc as non-self-employment income take the following steps:

• Income
• 1099-MIsc under Other Common Income
• Enter the information from the 1099-MIsc
• Continue through and say the work does NOT involve work that is like your main job
• Select the years you received it
• Say no, to did this involve an intent to earn money

Then you will take the following steps to remove the income:

• Income
• Less Common Income
• Miscellaneous Income
• Other Reportable Income
• Answer Yes to Any Other Taxable Income
• Enter the description such as 1099-Misc received for refund for faulty flooring
• Enter the amount on the 1099-Misc as a negative number. 

Be aware, the $4,000 that you are out is not tax deductible.  This is considered a personal expense for your property which is not deductible.

[Hal_Al]

Q. Do I need to claim this as income if it is a refund of my money spent on the flooring?

A.  No. As, you said this is only a refund or discount on a purchase and not income to you.

That said, the 1099 (I assume a 1099-Misc) is problematic. The IRS gets a copy and exacts to see that $8000 on your tax return. I'm of the opinion,  it's an erroneous document. 

If you received an erroneous 1099-Misc, you have several choices: 

1. Ideally, you get a corrected 1099-misc from the payer
2. Don't report it on your return. Attach a copy of the 1099 and a statement explaining the circumstances. You can't e-file. From the old IRS instructions for form 1099-Misc: Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.
3. Report the income as misc line 8z, Schedule 1 income  (enter in TurboTax at the 1099-NEC screen and identify it as sporadic income ["did not involve intent to earn money"]). Then enter a line 8z deduction, for the same amount.  In TurboTax (TT), enter at:
   - Federal Taxes tab
    - Wages & Income
   Scroll down to:
   -Less Common Income
         -Misc Income, 1099-A, 1099-C
          - On the next screen, choose – Other reportable income -  Answer yes to Any other Taxable Income -On the next screen, Enter the number with a minus sign (-) in front.  Briefly explain at description. Call it something like "erroneous 1099 received"
4. Do nothing and hope you can explain it away when & if the IRS contacts you

Most answers to this question, in this forum (and it's frequent question) recommend #3, if #1 fails (and it usually will). 

[adam-burdell]

Thanks so much for this info!