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The taxability of amounts received from the settlement of an insurance claim or a lawsuit depends on the nature of the settlement. That is:

  • If the settlement is compensation for lost business income that would have been taxable if the income had been received in the first place, the settlement is taxable in the same manner as the business income would be taxable.
  • If the settlement is compensation for personal injuries or (non- merchandise) property damages, the settlement amounts would not be taxable.

Example 1

Company A received a settlement from a lawsuit over the improper use of a photograph in a magazine. Are the settlement funds received by Company A considered taxable income for business and occupation (B&O) tax purposes?

Yes, the settlement is subject to the B&O tax because it is for services normally performed and/or goods normally sold by the business receiving the settlement. Here, Company A is in the business of selling photographs or granting a license to use photographs. Because that is the case, the amounts received from the settlement for misuse of the photographs are subject to the B&O tax.

Amounts received for a license to use a photograph are taxable under the royalties classification and taxable only if the recipient is domiciled in Washington.

Example 2

Company B, an engineering firm, received a settlement from an insurance claim for damages to its building caused by a vehicle that lost its brakes. Are the settlement funds received by Company B considered taxable income for business and occupation (B&O) tax purposes?

  • If the settlement is for lost business, the settlement is subject to the B&O tax under the service and other activities classification.
  • If the settlement is for property damages the settlement is not subject to the B&O tax (Company B is not regularly engaged in selling buildings).