Orange Company had machinery destroyed by a fire on December 23, 2017. The machinery had been acquired on April 1, 2015, for $49,000 and its adjusted basis was $14,200. The machinery was completely destroyed and Orange received $30,000 of insurance proceeds for the machine 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 the above.

Question

Quizplus · Accepted Answer

The insurance proceeds of $30,000 exceed the adjusted basis of $14,200, resulting in a gain. The gain is subject to § 1245 recapture, which means the gain is treated as ordinary income to the extent of prior depreciation deductions. The entire gain of $15,800 ($30,000 - $14,200) is recaptured as ordinary income under § 1245.

Orange Company Had Machinery Destroyed by a Fire on December