@DanielV01 @Carl I think we agree that FMV reduction due to casualty is reduced from the basis for business property.
However, I disagree that costs to repair a business property due to a casualty loss can be deducted as an expense. As per IRS Reg. 1.263(a)-3(k)(1)(iii), the cost of replacing or repairing business property destroyed or damaged due to a casualty event ordinarily must be depreciated as an improvement - a restoration.
Under the IRS repair regulations that took effect in 2014, a building owner is only required to depreciate restoration costs to the extent of the property's adjusted basis immediately before the casually event that damaged or destroyed the building. Any costs over this may be currently deducted if they constitute repairs under the IRS repair regulations. (IRS Reg. 1.263(a)-3(k)(4)(ii))
Also, please refer to specific business property examples,
Example 3. Restoration after casualty loss
B owns an office building that it uses in its trade or business. A storm damages the office building at a time when the building has an adjusted basis of $500,000. B deducts under section 165 a casualty loss in the amount of $50,000, and properly reduces its basis in the office building to $450,000. B hires a contractor to repair the damage to the building, including the repair of the building roof and the removal of debris from the building premises. B pays the contractor $50,000 for the work. Under
paragraph (k)(1)(iii) of this section, B must treat the $50,000 amount paid to the contractor as a restoration of the building structure because B properly adjusted its basis in that amount as a result of a casualty loss under section 165, and the amount does not exceed the limit in
paragraph (k)(4) of this section. Therefore, B must treat the amount paid as an improvement to the building unit of property and, under
paragraph (d)(2) of this section, must capitalize the amount paid.
Example 4. Restoration after casualty event
Assume the same facts as in
Example 3, except that B receives insurance proceeds of $50,000 after the casualty to compensate for its loss. B cannot deduct a casualty loss under section 165 because its loss was compensated by insurance. However, B properly reduces its basis in the property by the amount of the insurance proceeds. Under
paragraph (k)(1)(iii) of this section, B must treat the $50,000 amount paid to the contractor as a restoration of the building structure because B has properly taken a basis adjustment relating to a casualty event described in section 165, and the amount does not exceed the limit in
paragraph (k)(4) of this section. Therefore, B must treat the amount paid as an improvement to the building unit of property and, under
paragraph (d)(2) of this section, must capitalize the amount paid.
Now that it is clear that restoration due to casualty must be capitalized (to the extent of the basis before casualty) for business property, the only question is does it go back to the basis or a new asset should be created. I believe, it should be added back to the basis. (In my case, adding the cost of restoration back to the basis does not exceed the basis before casualty.)
If you disagree, can you please share relevant law, case law and examples?
