do you deduct the cost of the inventory in the previous or current year (ie you use the cash basis and do not value the year-end inventory) then you are expensing the cost including any lost in the fire. you can;t deduct your cost twice. so all you need do is either reduce purchase by the insyrance amount or report it as other income.
if you account for inventory (value year-end inventory for tax purposes), the destroyed inventory is will be expensed so you have taken a deduction for its cost. then all you have to do is enter the insurance reimbursement just like above.
