Question

Gordon is the sole proprietor of Fashion Flowers & Florals (FFF). During the current year, one of FFF's delivery vans is involved in an automobile accident. The van has a basis of $6,000. What is FFF's allowable casualty loss deduction under each of the following situations?

-A comparable van sells for $4,000. FFF's van was totally destroyed in the accident. FFF's insurance pays $2,200 on the casualty.

Answer 1

The deductible casualty loss for Fashion Flowers & Florals' van, after accounting for insurance, would be $1,800 calculated by the reduction in fair market value ($4,000) less the insurance reimbursement ($2,200).

Step-by-step explanation:

The student is asking about the allowable casualty loss deduction for a sole proprietorship, Fashion Flowers & Florals (FFF), owned by Gordon. Assuming the van has a basis of $6,000, the calculation for the casualty loss deduction can be determined as follows:

• First, determine the van's fair market value before the accident. In this case, a comparable van sells for $4,000.
• Next, assess the extent of damage. The van was completely destroyed in the accident.
• Lastly, consider any insurance reimbursement. Here, FFF received $2,200 from insurance on the casualty.

The deduction is calculated by taking the lesser of the van's adjusted basis ($6,000) or its decrease in fair market value due to the casualty ($4,000) and subtracting any insurance recovery. Therefore, the casualty loss deduction would be $4,000 (fair market value) minus $2,200 (insurance), resulting in a deductible loss of $1,800.