Involuntary Conversion

[Edward]

Client's generator stolen from tractor. Insurance paid 13782 for replacement. Total cost 13782 plus deductable of 1000. = 14782. Stolen generator was given 179 so he has zero basis. I have been thinking about reporting the 13782 on 4797 as ordinary income and then give a 179 deduction for the replacement cost of 14782. What would or could be the benefit of deferring the 13782 under section 1033 as opposed to reporting the insurance as ordinary income? T/P is trucker (1099-Misc) with taxable income of 53000. Any input would be appreciated.

[Burke]

Mmmmm... Assuming your client is Sche C, you would be reporting the ins reimb as ord income on 4797, carrying to 1040, then deducting full cost of generator as 179 on Sche C. Income tax would be a wash, but in effect you would be reducing SE tax on the bus income for a 2nd time. If you put the ins reimb in Other Income on Sche C, then it would work out. No double deduction for same property.

[Snaggletoof]

Double Deduction already exists

...given enough time. My only problem with s.179 is that it is not a cash payment, unless the proceeds of the insurance check came to the owner, and he actually paid for the new equipment with his own cash, although I'm sure there are those who would say this is paramount to the same thing.

Following your post, it would be very coincidental if the new generator just happened to cost $14,782, unless the insurance company settled in a manner that targeted the replacement cost and then applied the deductible.

the recapture of depreciation as ordinary (not SE) income already creates a deduction for SE purposes which is not recovered by taxing the 4797 at SE rates.

[Edward]

Involuntary Conversion

I contacted a "Tax Advisory Service" and they told me that in this situation, the t/p has two options - report insur proceeds in income or defer. Further, if t/p elects to report in income, to use 4797 (treat like a SALE) and that a 179 deduction on the replacement is appropriate. Further, they stated that with an INVOL CONVERSION there is no recapture (179/SE) actions because the INSUR is treated like a SALE, and therefore has nothing to do with a REDUCTION/CHANGE IN BUSINESS USE (which would trigger recapture). They cited Reg 1.179-1. I have prepared the return and by following their recommendations, will save the t/p about $1,450. I take it I can feel assured this will work??