Question

This year Amy purchased $2,200 of equipment for use in her business. However, the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Note that because Amy did not place the equipment into service during the year, she does not claim any depreciation expense for the equipment.

a. After the accident, Amy had the choice of repairing the equipment for $2,580 or selling the equipment to a junk shop for $410. Amy sold the equipment. What amount can Amy deduct for the loss of the equipment?

b. After the accident, Amy repaired the equipment for $1,410. What amount can Amy deduct for the loss of the equipment?

c. After the accident, Amy could not replace the equipment so she had the equipment repaired for $2,800. What amount can Amy deduct for the loss of the equipment?

Answer 1

a.

For the complete destruction of a business asset, Amy can claim a casualty loss deduction for the tax basis of the machine less any recovery. Hence, Amy can claim a casualty deduction for ($2,200 — $410) =$1,790

Deductible Amount: $1,790

b.

For partial destruction of a business asset, Amy can claim a casualty loss deduction for the lesser of the economic loss (the cost of repair) or the tax basis of the machine. In this case Amy can deduct $1,410

Deductible Amount: $1,410

c.

For partial destruction of a business asset, Amy can claim a casualty loss deduction for the lesser of the economic loss (the cost of repair) or the tax basis of the machine. In this case Amy can deduct $2,200

Deductible Amount: $2,200