Tax Benefit Rule

States that:

1. If a taxpayer recovers an amount that was deducted or credited against tax in a previous year, the recovery must be included in income to the extent that the deduction or credit reduced the tax liability in the earlier year. If no tax benefit was derived from a prior-year deduction or credit, the recovery does not have to be included in income.

2. If a taxpayer repays an amount that was previously included in taxable income, the repayment can be deducted in the year in which it is repaid.

Internal Revenue Service provision stating that amounts received in one period, representing a recovery of an amount deducted in a prior year, are to be included in income to the extent that the prior deduction resulted in a decrease in taxable income in that year.