A flood destroyed a business asset owned by Boochi Company. Boochi's adjusted tax basis in the asset was $87,100. Six months after the flood, Boochi used its $100,000 insurance settlement to replace the asset. Boochi can recognize a $12,900 gain or it can elect to defer gain recognition.

Question

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Boochi Company can elect to defer the recognition of the $12,900 gain (which is the difference between the insurance settlement of $100,000 and the adjusted tax basis of $87,100) if it uses the insurance proceeds to replace the asset within a specified period, according to the tax provisions for involuntary conversions.

A Flood Destroyed a Business Asset Owned by Boochi Company