The taxability of amounts received from the settlement of an insurance claim or a lawsuit depends on the nature of the settlement. A distinction is made between funds received in settlement of a claim for lost business income and settlement of a claim for mitigation of injury or property damages suffered. 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.
Company A received a settlement from a lawsuit over the improper use of a copyrighted 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 based on the amount of photograph misuse attributed to Washington. See WAC 458-20-19403 for attibution methods.
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).
Company C, a moving company, received payment from its landlord as a result of the landlord’s stated intention of breaching its lease with Company C before the lease expiration date. Are the settlement funds received by Company C considered taxable income for business and occupation (B&O) tax purposes?
No, the amount received by Company C from its landlord’s breach of the lease contract is not taxable income as it is not related to Company C’s business activities.