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Tax Benefit

Written By
Paul Tracy
Updated November 4, 2020

What is a Tax Benefit?

A tax benefit is any tax advantage given by the IRS to a taxpayer that reduces his or her tax burden. It's also the name of an IRS rule requiring companies to pay taxes on income that was previously written off but is subsequently recovered.

How Does a Tax Benefit Work?

For example, let's assume that in 2009, Company XYZ expected to receive $100,000 from a customer. The customer never paid, so Company XYZ wrote off the $100,000 receivable. This write-off is a tax-deductible expense, which means it lowered the amount of taxes Company XYZ owed at the end of the year. 

Now, let's assume that after a lot of wrangling, the customer finally paid its bill to Company XYZ in 2010. The tax benefit rule requires Company XYZ to report the $100,000 as income on its 2010 tax return and pay taxes on it.

Why Does a Tax Benefit Matter?

The tax benefit rule is intended to ensure that companies do not write off debt with the intention of collecting it later and not paying taxes on it. 

note, however, that the tax benefit rule does not prevent companies from taking advantage of changing tax rates (it doesn't protect them, either). In the example above, Company XYZ could theoretically pay a lower tax rate in 2010 (or a higher one). Also note that if Company XYZ earned so little in 2009 that it owed no taxes at all, then it is not required to pay tax on the money it recovers in 2010. However, the company must prove its case to the IRS if it invokes that argument.

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