No insurance, twice

Technical topics regarding tax preparation.
#1
Nilodop  
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Guy buys an expensive (+/- $15k) piece of medical equipment in 2019. No insurance coverage to pay for it. Clearly deductible as a medical expense, even though it's a capital expenditure under the usual rules. See reg. 1.213-1(e)(1)(iii). But he was a high income guy and got no tax benefit from that expense. Comes 2020 and guess what - the equipment gets destroyed in a fire in the small shed where he kept it when it was not in use. And his homeowners insurance did not cover it. It was worth $12k when the fire happened. His 2020 income will be way lower than 2019's.

He asked me what tax benefit he could get from this second event. I'm not sure if there's any at all.
 

#2
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Under current casualty loss regs, nothing, unless he is located in a Federal disaster area and I guess he could somehow (and legitimately) associate the two...that is, fire would have not occurred without what prompted Federal disaster declaration.
 

#3
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Wildfires in California...
 

#4
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If it was destroyed during a federally declared disaster, he can potentially deduct the lesser of adjusted basis (which should be cost to him) or the decrease in FMV as a result of the casualty, as long as he itemizes.

If not destroyed during a federally declared disaster no deduction. Tell those kids to stop smoking in the shed...too much sawdust in there.
 

#5
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Isn't the entire nation in a federally declared disaster since 3/13/2020? Does that mean ANY loss can qualify after that date?
[url]
https://www.fema.gov/news-release/20200 ... eclaration[/url]
 

#6
Nilodop  
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The casualty loss has to be
occurring in a disaster area and attributable to a federally declared disaster
. As CornerstoneCPA implies, don't think that helps.

This deduct the lesser of adjusted basis (which should be cost to him) about basis was one of my concerns. That 213 reg. above says it's a medical expense so did he lose all his basis in 2019?
 

#7
Nilodop  
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Assume for now that he keeps the basis of 15k. Value was 12k. If a casualty occurs for business asset, it's a business casualty loss. For personal asset, subject to all the limits, a personal casualty loss. So if the personal asset happens to be medical equipment, how about we make it a medical loss. Trouble with that is that sec 213 requires the expenses be "paid" in the year. Is destruction payment? Nah. Oh well, I tried.
 

#8
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Hang on a minute. He had a medical expense in one year and it may or may not have given him any tax benefit. Then it got destroyed. Surely his tax benefit flows from having to buy a replacement. Yes, I know it sucks to have to replace something so soon.

What sort of medical equipment is it that he keeps it in a shed? My late neighbor down the street had a power chair that he kept attached to his car at all times, but he kept it in the garage (obviously) and not in a shed.
 

#9
Nilodop  
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It did not give him a tax benefit in 2019. Hence the basis question.

It's a power wheel chair.

I can call it a garage if shed is not acceptable.

You see, this whole thread is hypothetical. I made it up.
 

#10
Nilodop  
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Just 'cause I made it up, it's no longer of interest? Let me simplify it to raise my real point and get rid of the clutter caused by the casualty. Here are the new facts.

Guy buys an expensive (+/- $15k) piece of medical equipment in January, 2019. No insurance coverage to pay for it. Clearly deductible as a medical expense, even though it's a capital expenditure under the usual rules. See reg. 1.213-1(e)(1)(iii). But he was a high income guy and got no tax benefit from that expense. Comes 2020 and guess what. The equipment is no longer needed. So he wants to sell it now, in November or December, 2020. What's his tax basis?
 

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What’s his method of accounting?
 

#12
Wiles  
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His basis is $15k and I will use the tax benefit rule as my authority. However, it may boil down to whether the shed has a metal floor or a concrete floor.

Isn’t this the same as not having to recover/unrecapture depreciation on a home office if the 2% floor prevented the deduction?
 

#13
Nilodop  
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I don't know. Can you link me to where that's covered? Or, to save a step, compare where that's covered with the reg. I cited in OP.
 

#14
Wiles  
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I was wrong. The tax benefit rule does not apply to depreciation deductions. Reg 1.111-1(a).
 

#15
Nilodop  
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Depreciation? What depreciation?
 

#16
Wiles  
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Reg 1.213-1(e)(1)(iii) “bonus depreciation”
 

#17
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Only the amount of medical expenses that exceed the AGI threshold are allowed/allowable as a deduction:

213(a)Allowance of Deduction

There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent...to the extent that such expenses exceed 10 percent of adjusted gross income.


Under Sec 1016, don't we adjust basis down for allowed/allowable on property?

I would think that still applies regardless of treatment under Treas Reg Sec 1.213-1(e)(1)(iii), which as that paragraph states, is only applicable for purposes of Sec 213 and the related regs. But, I'm not the sharpest tool in the shed---oops garage.
 

#18
Nilodop  
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It's a nice theory - that the expense being allowed under 213 is depreciation - but I don't see it. I think it's just a 213 medical expense.

And yes, I said he got no tax benefit and he was a high earner in 2019. That could result from the 10% threshold's not being met.or from his just not itemizing that year. I wonder whether it makes a difference.

Conveniently, it turns out that Pub 502 https://www.irs.gov/publications/p502#e ... 1000179127 has a section on sale of medical equipment. It even has a worksheet D and one called E. But I'm not sure it answers our question. What do you think?
 

#19
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I think it does.

The adjusted basis is the portion of the cost of the equipment or property that you couldn't deduct because of the 7.5% or 10% AGI limit used to figure your medical deduction. Refer to your Schedule A for the year the cost was included to determine which limit applied to you. Use Worksheet D to figure the adjusted basis of the equipment or property.

But I'm a little confused by line 5 on worksheet D. It seems to suggest adjusted basis may be higher than cost basis for medical equipment if no deduction was allowed because AGI was too high.

Running some numbers down:

1) $15,000
2) $30,000
3) .50
4) $35,000
5) $17,500 (this is supposed to be adjusted basis of the equipment on line 1??)

Interesting that this is in a pub. Surely there's a rev proc out there that touches on it?
 

#20
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That's what it leads us to believe, but I don't think that's correct.

Perhaps line 5 should be worded:

Multiply line 3 by line 4. If your allowable itemized deductions for the year you purchased the equipment or property weren't more than your AGI for that year, stop here. This is the adjusted basis of the equipment or property. The adjusted basis of the equipment or property is the lesser of line 1 or this line. If your allowable itemized deductions for the year you purchased the equipment or property were more than your AGI for that year, complete lines 6 through 11

Or, we're not supposed to use worksheet D at all if medical expenses were limited by AGI for the year in question.

Either way, it's not exactly clear.
 

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