Casualty Loss Form

If insurance fully reimburses for casualty damage, with no resulting gain or loss, is Form 4684 required for the basis adjustment?

Simplified example: a business asset cost $10,000, had $2,000 damage from an accident, and insurance provided $2,000 for the damage. Basis is reduced by $2,000, but there is no gain or loss to report.

It doesn't appear that form 4684 is mandatory...

Thanks,

Vince DiChiacchio, CPA

Note this difference in instructions between Form 4797 and Form 4684.

Purpose of Form
Use Form 4797 to report:
The sale or exchange of:
[It list various kinds of property. Then it says:]
The involuntary conversion (from
other than casualty or theft) of property used in your trade or business and capital assets held for more than 1 year in connection with a trade or business or a transaction entered into for profit ...

Purpose of Form
Use Form 4684 to report gains and losses from casualties and thefts.

So if you sell or exchange the property, you report it on 4797 even if there is a break-even, but if it is the subject of a reimbursed casualty at break-even, you don't need to report it on 4684. Go figure. I'd probably report it, but wouldn't worry if cleint says not to.

BTW, what is section 126 property? (See 4797 instructions.)

"BTW, what is section 126 property?"

Code § 1255(a)(2) is quite instructive in that regard, but seems to me to trigger the *fungibility* problem that we so often encounter when a code provision (or lesser authority, too, I guess) has been written by a lawyer rather than an accountant.

And, for kicks, which of hte following ways to record the events is proper tax accounting?
This:
Dr Non-deductible loss
Cr Basis of asset

Dr Cash
Cr Non-taxable income

Or
That:
Dr Cash
Cr Basis of asset

Probably depends, but I choose Dr Cash, Cr Basis.

And, for kicks, which of hte following ways to record the events is proper tax accounting?
This:
Dr Non-deductible loss
Cr Basis of asset

Dr Cash
Cr Non-taxable income

Or
That:
Dr Cash
Cr Basis of asset

Right choice, but I don't think it depends. Section 165 defines the loss as follows:

(a) General rule
There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

. So I'd say it's not even a loss in the eyes of the Code. But I admit the contra argument is that it is a loss but not an allowed one. And I'd also admit that either set of entries is just fine. And I'm not even sure why I posted such a silly question.