IRS issues BP payment tax answers
Friday, June 25, 2010
Whoa! That didn't take long. Louisiana Sen. Mary Landrieu asked and the IRS answered.
Specifically, the IRS has issued the requested guidance on the tax treatment of payments by BP in connection with the Deepwater Horizon oil spill.
The bottom line is what we expected, If you got or get money from the oil company, you'll owe taxes on it.
The IRS tackles that issue in the first item of its Gulf Oil Spill Questions and Answers:
Q1. Is a taxpayer required to include in gross income payments the taxpayer receives for lost business income, lost wages or lost profits?
A1. Yes. The law requires that a taxpayer include in gross income payments the taxpayer receives for lost business income, lost wages or lost profits. For information on whether estimated tax payments may be required, see Publication 505, Tax Withholding and Estimated Tax.
A self-employed individual who receives a payment that represents compensation for lost income of the individual's trade or business should include the amount of the payment in net earnings from self-employment for purposes of the self-employment tax. For more information about reporting self-employment income and paying self-employment tax, see Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ).Generally, a payment to an individual to compensate for lost wages will not be wages for purposes of the social security tax and Medicare tax because it is not an actual payment for employment within the meaning of the law. These payments will also generally not be subject to income tax withholding, unless backup withholding applies. See A2, below, for a discussion of backup withholding. However, if the payment is made by an employer to its own employees, or by a third party to employees of another employer in satisfaction of an obligation of that employer to its employees, the payment may be subject to social security tax, Medicare tax, and income tax withholding.
And as Q&A item number two points out, don't try to get away with not reporting the payment. BP is required to issue you and the IRS a Form 1099-MISC detailing the amount you received.
In-person assistance also planned: To help affected individuals and businesses find tax answers to their specific situations, the IRS is holding a special assistance day on July 17 in seven Gulf Coast cities:
- Panama City and Pensacola, Florida;
- New Orleans, Houma
and Baton Rouge, Louisiana; and
- Gulfport, Mississippi.
That day, taxpayers and tax preparers will be able to work directly with IRS
employees to resolve tax issues, including specific topics related to
the oil spill.
The IRS will announce times and specific locations on its website as July 17 nears.
And in addition to the oil spill-tax FAQ and face-to-face assistance day, the IRS also has created an online Gulf Oil Spill Information Center.
Current law notation: A phrase repeated in the various IRS oil spill tax info also caught my eye --
Yep, the IRS knows all too well how Congress likes to meddle with the tax code.
As I mentioned in my post about the Landrieu letter requesting tax guidance, there is a real possibility that Capitol Hill will try to change the tax treatment of oil spill payments.
Whether it will be successful or simply give Representatives and Senators some populist, "I feel your tax pain" cover as they're on the campaign re-election trail this fall (Cynical much? Yes.) waits to be seen.
So until any potential changes are made, your best move is to familiarize yourself with your tax BP payment tax responsibilities as they now exist and plan accordingly.
- Sen. Landrieu asks Treasury, IRS for clarification
of taxes on BP payments
- Are BP payments taxable income?
- Unemployment's terrible tax surprise
- Tax concerns of the unemployed
- Energy Star rebates aren't federal income
- Yes to more oil spill trust fund money;
No to higher oil company taxes
I'm sure you're correct, both on the timing of the the letter/IRS guidance and the political hay to be made of it! ;-D
Posted by: Kay | Saturday, June 26, 2010 at 12:44 AM
The IRS must have already had that guidance ready to go before Landrieu sent the letter. It's a coincidence, but I am sure she'll take credit for it.
Posted by: Peter | Friday, June 25, 2010 at 09:36 PM