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Level 2

Is a lawsuit settlement to my LLC taxable?

We sued our company's workers comp insurance for Damages and Declaratory Relief. They settled. Is that settlement amount taxable as income to my LLC?

 

The reason we sued them was that they wrongfully terminated our workers comp insurance unbeknownst to us, and an employee claimed an injury and sued us and won a verdict against us. The settlement was global where they paid him and us. The settlement amount did not begin to compensate us for all that we suffered in the process, but it was better than nothing.

1 Reply
Level 20

Is a lawsuit settlement to my LLC taxable?

"We sued" tells me this is a multi-member LLC. If "we" is married and I'm right, what kind of tax return is filed for the LLC? A 1065 Multi-Member LLC/Partnership return? Or something else?

If "the business" sued, then all income received by 'the business" is taxable income to the business. But if this is a single member LLC only owned by one of you, this gets complicated since the IRS considers a single member LLC to be a disregarded entity. If a 1065 return is filed, then it's even more complicated.

But overall based on what I'm reading at https://www.hhcpa.com/blogs/income-tax-accountants-cpa/when-are-legal-settlements-taxable/ it appears to me that it's 100% taxable income weather paid to your business, or to you personally. You didn't suffer any physical damage and you were not unable to work, and you didn't lose any wages. So it's 100% taxable.

Overall though, I think it would be in your best interest to consult with a tax attorney. Not a CPA, but a tax *attorney*. This would especially be advised if your state also taxes personal income. Do note that if was "the business" that sued, then your fees for this consultation could be paid by the business and deducted a a business legal expense.