Taxpayer received 1099-MISC, box 7 for damages incurred on residence due to city negligence. Where would I offset this income? Schedule C with other expenses?

[linduca1216]

Result of a lawsuit against the city... 

[itonewbie]

"for damages incurred on residence"
What has this got to do with Sch C?

"Where would I offset this income? Schedule C with other expenses?"
What expenses do you have in mind to offset this income?

What kind of damages has the taxpayer sustained?  If any loss was claimed, when and how was that reported?

[linduca1216]

It doesn't.  BUT the city entered it in Box 7  

[linduca1216]

RE: damages, etc., there was a lawsuit against the city and the taxpayer won... Water dept negligence resulted in the entire home being destroyed..

[itonewbie]

First, it sounds like they should issue a corrected 1099-MISC and report that amount in Box 3 instead.

Could you also respond to the other questions?

[linduca1216]

Yes, it sounds like they should... .but I doubt if that will happen....
RE: losses sustained.  They have no house!   It exploded due to gas build-up and water dept mis-marking some lines...  Thank heavens, no one near the home was hurt...

[itonewbie]

Thank goodness, no one got hurt!  OK, losses sustained.  What about responses to the other two questions?

[linduca1216]

I'm missing something here... what other 2 questions?  RE: Sched C, it was only to match report and was thinking there might be a "misc" expense entry to offset it. (City will prob NOT change it...)   No loss claimed to date...

[itonewbie]

What kind of expense do you intend to use to offset the income?
When was the loss incurred?

[linduca1216]

Incident occured about 2 years ago... Settled in 2018.    I think I'll need to check w/ the attorney so see if there was any additional reimb to taxpayer....  Didn't think this through very well... sorry...  My understanding was that they lost, in value, more than they gained in the settlelemt.

[itonewbie]

NP.  Please come back when you have more info.

[qbteachmt]

Sched C means "operating as a business" and subject to self-employment taxes. If this was their personal residence, it doesn't seem Sched C applies.

[linduca1216]

I totally agree, but I don't think the city will change how the proceeds were coded and am trying to figure out how to offset the amount.

[TaxGuyBill · Accepted solution]

Yes, because it is not business income and the city improperly put the amount in Box 7, you can likely avoid an IRS notice by reporting the 1099-MISC on Schedule C with an offset of the name amount as an expense (resulting in $0 profit).  I would enter the 'expense' as an 'other' expenses with a description of where the amount is being properly reported.

As for how to properly report the actual loss and payment, it is sounding like it could be payment to offset a Casualty Loss, but you may need to look into the details a bit further for that.

[linduca1216]

I agree... thanks!