Tax Deductible Losses and Insurance -
Are They Mutually Exclusive?

Policyholder Advisor & Alert

PUBLISHED ON: September 1, 2000

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With certain exceptions,the Internal Revenue Code does not focus on taxpayers’ insurance coverage. Indeed,the term “insurance” is nowhere defined in the Code. However, insurance and the receipt of insurance proceeds is of fundamental importance in several areas of tax law. One of these is business losses.

The Code and case law have, for some time, tied together the existence of insurance and the tax deduction for a business loss. Code Section 165 states, as a general rule, that corporations are allowed to deduct virtually any loss (arising from legal activities) for which they are not reimbursed by insurance or otherwise. A corporate taxpayer can deduct an amount up to the adjusted basis of the property involved in the loss, but this amount is reduced by any insurance or other recovery. This has been in the tax law for some time.