Sherri Posted February 21, 2009 Report Share Posted February 21, 2009 Client had a biz in a mall, sold animals (puppies, cats and fish).The resturant next door caught fire, and the smoke damage was horrific. The mall closed them down and they took a heavy loss. This was in December 2005. Last August after suing the insurance company, they recieved a settlement.. They recieved $200,000, for punitive damages, attorney fees and compensatory damages. The check was written to the lawyer, who put it in escrow, after reciving their cut. The clients recieved a check for $20,000 after lawyers got theirs. They have recieved nothing from the lawyer (1099) or anything about it. I know that punitive damages are taxable income, but I guess this time of the year, my brain is on overload and I'm not sure how to handle it. The lawyer said they would take care of it for tax purposes. (told off my assistant manager today, and it's been all down hill from there). Could really use a little help here. Thanks a bunch, Sherri Quote Link to comment Share on other sites More sharing options...
Maura Posted February 21, 2009 Report Share Posted February 21, 2009 What type entity is the biz? My take on it is that the whole amount is taxable income. The legal fees would be deductible. Does your client have any papers filed during proceedings or from the court spelling out the legal fees awarded? From your description they sound defensive. Quote Link to comment Share on other sites More sharing options...
Sherri Posted February 21, 2009 Author Report Share Posted February 21, 2009 What type entity is the biz? My take on it is that the whole amount is taxable income. The legal fees would be deductible. Does your client have any papers filed during proceedings or from the court spelling out the legal fees awarded? From your description they sound defensive. This is a Sched C biz. Nothing more. No 1120S. The only papers are the settlement agreement that states the amount for payment of punitive damages, attorney fees and compesatory damages. The check was written out to the lawyer, who deposited it into the firms escrow account, and then they wrote a check out to my cliet for the $20,000. They have recieved nothing else. No 1099's or anything. Quote Link to comment Share on other sites More sharing options...
ed_accountant Posted February 21, 2009 Report Share Posted February 21, 2009 If the 20,000 received is a replacement of "heavy losses" of income than you should report it as business income. I would verify with the client that her social security # was not given to the insurance company or the attorney to confirm that there will be no 1099. Usually, the payor / insurance company, do issue 1099s and it would be for the gross amount. Quote Link to comment Share on other sites More sharing options...
Sherri Posted February 21, 2009 Author Report Share Posted February 21, 2009 If the 20,000 received is a replacement of "heavy losses" of income than you should report it as business income. I would verify with the client that her social security # was not given to the insurance company or the attorney to confirm that there will be no 1099. Usually, the payor / insurance company, do issue 1099s and it would be for the gross amount. They recieved nothing, and the settlement papers say they cannot discuss this with anyone, but we're told they could tell me. The lawyer told them he'd take care of it, when the check was written to him. Thanks Ed Sherri Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted February 22, 2009 Report Share Posted February 22, 2009 It is common practice for the check to go to the attorney, who then pays out the funds to cover expenses, reimburse advances, if any, etc. The normal thing is that he then prepares a 1099, which would normally be for the entire taxable amount, which includes the attorney's portion, and the expenses as well. He's going to have to report the $200K, then deduct the expenses on Sch C and/or Sch A. I know that is not what you or he want to hear, but that is the law. Download Pub 584 and Pub 584-B for a starting place. Quote Link to comment Share on other sites More sharing options...
Sherri Posted February 22, 2009 Author Report Share Posted February 22, 2009 It is common practice for the check to go to the attorney, who then pays out the funds to cover expenses, reimburse advances, if any, etc. The normal thing is that he then prepares a 1099, which would normally be for the entire taxable amount, which includes the attorney's portion, and the expenses as well. He's going to have to report the $200K, then deduct the expenses on Sch C and/or Sch A. I know that is not what you or he want to hear, but that is the law. Download Pub 584 and Pub 584-B for a starting place. Thanks KC, I knew I could count on you. I'll hace my clients call the attorney. Sherri Quote Link to comment Share on other sites More sharing options...
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