how is it a gain on sale of vehicle used for business when totaled in accident?

As you use a vehicle and take a tax deduction for depreciation on it the IRS gives you a tax credit.  When you sell that vehicle they require you to pay that credit back with the proceeds from the sale.  In your case you didn't really sell it but you were paid for it all the same so the IRS requires that you pay taxes on the portion of the proceeds that represents the depreciation deduction that you already took.

@rabette 

When you use a vehicle in business, you claim depreciation.  Either you claim it specifically, or it is included in the standard mileage rate.  Depreciation is "wear and tear" and accounts for the fact that you are "using up" the vehicle in business, that business is reducing its value.  That reduces your cost basis.

Suppose you buy the van for $50,000 and over the lifetime of its use, you deduct $40,000 of depreciation.  Then it is totaled and you get $20,000 back.  That means that you claimed too much wear and tear--you claimed that you used up $40,000 of the value, but the insurance payment proves you only used up $30,000 of the value.  Therefore, the difference is taxable income to your business, because it is a reimbursement of an expense that you previously deducted.

Suppose instead you bought a tool for $100 on December 2 and claimed it as a deductible business expense.  It breaks on January 4 and instead of repairing it, you return it for cash and buy something else.  That cash refund is business income, because it is a reimbursement of an expense you previously deducted.  Same idea.