Don operates a taxi business, and this year one of his taxis was damaged in a traffic accident. The taxi was originally purchased for $32,000 and the adjusted basis was $2,000 at the time of the accident. The taxi was repaired at a cost of $2,500 and insurance reimbursed Don $700 of this cost. What is the amount of Don's casualty loss deduction?

Question

Quizplus · Accepted Answer

The casualty loss deduction is calculated as the lesser of the adjusted basis of the property before the casualty or the decrease in fair market value because of the casualty, minus any insurance reimbursements. Since the adjusted basis is $2,000 and the repair costs were $2,500 with an insurance reimbursement of $700, the actual out-of-pocket expense is $1,800. However, because the adjusted basis ($2,000) is used for the calculation and is lower, you subtract the insurance reimbursement of $700 from the adjusted basis, resulting in a deductible loss of $1,300.

Don Operates a Taxi Business, and This Year One of His