Question

Derrick owns a farm in eastern North Carolina. A hurricane hit the area and destroyed a farm building and some farm equipment and damaged a barn. Item Adjusted Basis FMV before Damage FMV after Damage Insurance Proceeds Building $ 99,500 $ 142,000 $ 0 $ 57,000 Equipment 84,100 60,000 0 18,400 Barn 110,700 170,400 110,700 45,600 Due to the extensive damage throughout the area, the President of the United States declared all areas affected by the hurricane as a disaster area. Derrick, who files a joint return with his wife, had $50,400 of taxable income last year. Their taxable income for the current year is $166,200, excluding the loss from the hurricane. a-1. Calculate the amount of the loss deductible by Derrick and his wife. a-2. What amount of loss should be adjusted against current and last year?

Answer 1

1) The amount of loss deductible by Derrick and his wife is $122,300.

a.) Loss on building = adjusted basis - insurance proceeds = $99,500 - $57,000 = $42,500 (loss)

b.) Loss on equipment = adjusted basis - insurance proceeds = $84,100 - $18,400 =$65,700 (loss)

c.) Loss on Barn = adjusted basis - insurance proceeds. = $59,700 - $45,600 =$14,100 (loss).

* $59,700 = $170,400 - $110,700.

Note : - the partial destruction of barn is shown. Now, the adjusted basis of barn is $51,000 ($110,700 - $59,700).

The total loss deductible = a + b + c

= $42,500 +$65,700 +$14,100 = $122,300.

2) the loss must be deduct in the year the loss is occurred but if the loss is occurred from a federally declared disaster area then the tax payer gets a choice of deducting the loss in the year it occurred or the tax payer can deduct the loss in the next tax year. If the tax payer deduct the loss from the last year return that will result in refund.

The last year taxable income of the Derrick and his wife is $50,400, the Derrick and his wife can deduct the loss upto $50,400 from last year taxable income and the remaining loss in the current year which is $71,900.

Or the Derrick and his wife can deduct the whole amount of loss in the current year that is $122,300. Which will lower their tax in current year.