J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Involuntary Conversions

If business property is destroyed or stolen, condemned or disposed of through threat of condemnation and you receive insurance proceeds or other funds to compensate you for your loss, you have suffered an involuntary conversion. Condemnations are the taking of your property for public purposes, such as building roads or putting up utility poles—in effect a forced sale. Threat of condemnation occurs when you learn from a government official or other authorized person that the government intends to take your property. If you do not sell it to the government, it will be condemned.

If the funds you receive for the involuntary conversion of your property exceed your adjusted basis in the involuntarily converted property, you have a gain that is currently taxable unless you qualify to postpone your gain (explained later). If the funds you receive are less than your adjusted basis in the involuntarily converted property, you have a loss that is currently deductible (subject to usual loss limitation rules discussed in this chapter and in Chapter 5).

Adjusted basis

This is your basis in the property, adjusted for certain items. Start with your original cost if you bought the property (the cash and other property you paid to acquire it). Even if the cash did not come out of your pocket, for example, if you took a loan, the cash you turn over to the seller is part of your basis. Then, adjust the basis by reducing it for any depreciation claimed (or that could have ...