Question

On July 1, 2018 a strong storm came through NW Michigan and knocked down a tree that crushed one-half of the c corporation furniture warehouse. The fair market value at the time of the storm was $500,000. The original cost of the warehouse was $600,000. The depreciation deduction that the company claimed $200,000. On Seprember 1, 2018 the company received insurance proceeds of $50,000 related to damage from the storm. The company believes the damage to half of the warehouse should be reported as a casualty loss for tax purposes. What would be a casualty loss?

Answer 1

A casualty loss occurs when there is a property damage from sudden, unanticipated event.

The tax payer can claim casualty loss in the year it occurs

Note: it is not mentioned in the question that the area or taxpayer is within the federally declared disaster area or not

Amount of loss:

1) Determine the adjusted basis in the property before the casualty  

Adjusted amount = original cost ($600,000) - depreciation($200,000)

Adjusted amount = $400,000

2) Determine the decrease in fair market value(FMV) of the property as a result of casualty. Amount of Fair market value is $500,000

Note:- no information is provided regarding the decrease in fair market value due to casualty. The amount for fair market value will be taken as $500,000.

3)Subtract any insurance proceeds from the smaller of the amounts determined in 1) and 2)

Insurance proceeds $50,000

Smaller amount $400,000

Smaller amount - insurance proceeds

$400,000 - $50,000 =$350,000 as a casualty loss.

Casualty loss =$350,000.