Is Cash in Lieu of Repairs taxable income?

[infini_zx]

Last year, I bought an RV for $75,000 that turned out to have some cosmetic defects.  Since it was determined to be impractical to have them repaired, the manufacturer offered to cut me a $4500 check for the approximate value of the repairs, which I accepted.  Part of the money was used to pay down my loan for the RV, while the rest was used for other expenses.  I received a 1099-MISC for the check, which severely dropped my tax refund when entered. 

Since the check was more of a partial refund and not for compensation of any work I performed, should it not be considered taxable income?  My argument is that it shouldn't since in exchange for gaining $4500 cash, I bought something that is now determined to be worth $4500 less than what I paid.  If so, how would I go about correcting this?

[DavidD66 · Accepted solution]

You're right, the $4,500 is not taxable income, it is a reduction in the amount you paid for the RV.  You have several choices for how to handle this:

1. Don't report it.  Instead, attach a copy of your 1099-MISC and a statement explaining what happened.  You won't be able to e-file your returns - you will have to print and mail. 
2. Report the Income on schedule C - Profit or Loss from Business (Sole Proprietorship), and then take a deduction for the same amount under other expenses. You will have to upgrade to the Self Employed version of TurboTax. 
3. Report it as Miscellaneous Income on line 21, then enter a  deduction on line 21 for the same amount.  
4. Do nothing and explain the situation to the IRS when they send you a letter.