Handling and Reporting Income from Insurance Reimbursement

How much ordinary income should Ian report on his 2016 income tax return?

A. $0

B. $1,500

C. $6,000

D. $7,000

Answer:

Ian should report $7,000 of ordinary income on his 2016 income tax return.

To determine the amount of ordinary income Ian should report on his 2016 income tax return, we need to calculate the gain on the sale of the forklift. The gain is equal to the insurance reimbursement ($9,000) minus the adjusted basis ($2,000), which is $7,000. Since the gain is positive, Ian should report it as ordinary income on his tax return. Therefore, the correct answer is D. $7,000.

When Ian's forklift was destroyed by a tornado in 2016, he had an adjusted basis of $2,000 after deducting $6,000 of depreciation from the original purchase price of $8,000. His insurance company reimbursed him $9,000, resulting in a gain of $7,000. Ian should report this amount as ordinary income on his income tax return.