Orange Company had machinery completely destroyed by a fire on December 23, 2019.The machinery had been acquired on April 1, 2017, for $49,000 and its adjusted basis was $14,200.Orange received $30,000 of insurance proceeds for the machinery and did not replace it.This was Orange's only casualty or theft event for the year.As a result of this event, Orange has:
A)$4,200 ordinary loss.
B)$15,800 § 1245 recapture gain.
C)$14,200 § 1245 recapture gain.
D)$30,000 § 1231 gain.
E)None of these.

Question

Quizplus · Accepted Answer

The correct answer is B) $15,800 § 1245 recapture gain. This is because the insurance proceeds of $30,000 exceed the adjusted basis of the machinery ($14,200), resulting in a gain. Since the machinery is Section 1245 property (tangible personal property), the gain up to the amount of depreciation previously taken is treated as ordinary income under Section 1245 recapture rules. The original cost was $49,000, and the adjusted basis at the time of the casualty was $14,200, indicating that $34,800 of depreciation had been taken. The gain of $15,800 ($30,000 insurance proceeds minus $14,200 adjusted basis) is therefore fully recaptured as ordinary income under Section 1245.

Orange Company Had Machinery Completely Destroyed by a Fire on December