It depends on the assets taxable value at the time it was destroyed, lost, stolen, or sold..
Using a simple round number it works like this:
You buy an asset for $1000, and it gets destroyed 1 year later.
If you elected to depreciate the item over 5 years then you have realized only 10% of the allowable depreciation. (100% -10% -20% -20% -20% -20% -10% = Zero)
However, the asset is now a premature zero (destroyed) and you would claim the remaining 90% depreciation as a casualty loss (= $900)
Remember, the $900 is a reductrion of your income before the tax rate is applied and not a reduction (credit) in the actual tax payable. If you are in the 28% tax bracket a $900 deduction represents a maximum tax savings of $252.
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Now, let's assume that instead of depreciating the asset - you elect to take all of your depreciation in the first year under the Section 179 expense allowance (up to $200,000).
In this instance the asset is already fully depreciated by the time it gets destroyed, and you have realized the full 100% depreciable value. Your casualty loss for tax purposes is = $0.
The only tax benefit to you is the dedcution for any NEW purchase you make. You would buy another $1000 replacement, and under the same section 179 clause realize a $1000 decution for the NEW asset.
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Another year goes buy, and this time you SELL your $1000 asset to an aspiring young DJ who pays you $800 for it.
You already claimed on your tax return that it's value was $0 !!! Obviously, you were mistaken because someone gladly paid you $800 for it. Uncle Sam requires that you "recapture" that portion of the depreciable value that you over-represented. Thus, on your next tax return you must either recapture $800 of the previous deduction you took for depreciation.
This is why for example, many business will "give away" certain property after it has been fully depreciated even though it may still have a market value. If you aregoing to get new office furniture - sellingthe old stuff will create a taxable event. Telling the employees to take it home with them, or donating it to charity will not.
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Now, take the same scenario, but this time the aspiring young DJ paid $1300.
You will have to recapture all $1000 of your previous deduction, AND claim the adittional $300 as a capital gain.
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If any of your property is destroyed and subsequently covered or replaced by insurance - you do not incur a loss for tax purposes unless the insurance falls short of the asset's current depreciable value.
For example, your asset had $600 remaining in depreciated value, but insurance reimbursed you for only $400. You would have a deductible loss of $200. How you represent this in your tax filing may vary.
Insurance benefits are separate from the tax code, except where insurance proceeds are income and subject to tax. So while one does not change the other - the amounts can to some extent offset each other. Whether you claim the insurance settlement as income or a reduction in depreciation is a matter of accounting method.
