Insurance Income for damaged artwork (artist)

[jasdlm]

Client is an artist.  Studio flooded in 2014 and work was lost/damaged.  Landlord's insurance company reimbursed client tens of thousands of dollars for the unsold work.  (No 1099 issued.)  I'm assuming this is taxable sort of like replaced wages?  I don't know what the work would have sold for (i.e. if client received a windfall or was shorted).  Some work was completed; some in progress.  Any one have an idea?  There were also items damaged that were not work (supplies, etc.).  There is no breakdown with the check.  I'm not sure what to do.

 

Now I'm having second thoughts.  No losses claimed, but no gain?  Maybe I'm too tired.  Why can't I think this through?

Edited April 13, 2015 by jasdlm

[Terry D EA]

Well there could be some type of loss here to offset any gain. Form 4684 is in order but the difficult part is to establish basis and FMV for the damaged items. I think it would be your client's responsibility to provide the basis and FMV.

[jklcpa]

Interesting post.  I have lots of questions.  What type of entity is this business, a Schedule C?  How was the value determined?  Wouldn't the artwork be your client's inventory for sale, or inventory in process?  Does your client record costs as inventory?  If so, there are 2 methods a business can use to report a casualty or theft loss involving inventory.  The first method is to account for the loss by using the actual opening and closing inventories, and since the items are written off as no longer in existence at the year-end, the deduction is in cost of sales, and you would reduce this by any insurance proceeds received.  The other method is to report the loss of inventory as a separately stated item, reduced by any insurance received.

 

If your client doesn't record inventory but instead just has his materials costs, does the portion of the insurance reimbursement related to the artwork exceed those costs for the year?  Then it seems like he would have a gain from that portion, and I'd be more inclined to show that as a separate line item and not through COS.

 

The damages to the studio would definitely be reported on Form 4684 with the FMV being ignored since it is related to business or income-producing property.

 

That's without doing any research specific to an artist, but I've had many thefts of inventory over my career with my retail clients, and I've always run it through COS with any insurance received as a reduction. 

[jasdlm]

Thanks much to both of you.  It is a Schedule C.  The problem is, I have no itemization of what the reimbursement is for or how the number was calculated.  I'll keep working for information.