Question

Leslie is in the business of dairy farming. During the year, one of her barns was completely destroyed by fire. The adjusted basis of the barn was $90,000. The fair market value of the barn before the fire was $75,000. The barn was insured for 95 percent of its fair market value, and Leslie recovered this amount under the insurance policy. Leslie has adjusted gross income for the year of $40,000 (before considering the casualty). The amount of loss she can deduct on her tax return for the current year is:

a. $14,750.
b. $3,750.
c. $14,650.
d. $18,750.
e. None of these choices are correct.

Answer 1

Leslie cannot deduct any loss on her tax return due to the insurance recovery being equal to or greater than the deductible loss.

Step-by-step explanation:

Leslie can deduct the loss on her tax return for the current year by calculating the difference between the adjusted basis and the insurance recovery amount.

The deductible loss would be the smaller of the adjusted basis ($90,000) or the difference between the adjusted basis and the fair market value ($90,000 - $75,000 = $15,000).

However, since Leslie recovered the insurance amount of 95% of the fair market value ($75,000 x 95% = $71,250), she cannot deduct any loss on her tax return. The correct answer is e. None of these choices are correct.