On July 24 of the current year, Trevor Pickard was involved in an accident with his business use automobile. Trevor had purchased the car for $30,000. The automobile had a fair market value of $20,000 before the accident and $8,000 immediately after the accident. Trevor has taken $20,000 of depreciation on the car. The car is insured for the fair market value of any loss. Because of Trevor's history, he is afraid that if he submits a claim, his policy will be canceled. Therefore, he is considering not filing a claim. Trevor believes that the tax loss deduction will help mitigate the loss of the insurance reimbursement. Trevor's current marginal tax rate is 35%. a. Complete the letter to Trevor that contains your advice with respect to the tax and cash-flow consequences of filing versus not filing a claim for the insurance reimbursement for the damage to his car. SWET, LLP 5191 Natorp Boulevard Mason, OH 45040 January 27, 2022 Mr. Trevor Pickard 450 Colonel's Way Warrensburg, MO 64093 Dear Mr. Trevor: This letter is to inform you of the tax and cash-flow consequences of filing a claim versus not filing a claim with your insurance company for reimbursement for damages to your business-use car. If an insurance claim is filed, you will have a deductible loss X of $ This is determined by computing the difference between the cost X and the greater X of the adjusted basis or decrease in FMV . The result will produce a net cash flow of $ If no insurance claim is filed, you will have a deductible loss ✓ of $ , which will increase X your tax liability by $ The net cash benefit ✓ resulting from filing an insurance reimbursement claim would be Should you need more information or need to clarify anything, please contact me. Sincerely, Jennifer Sampson, CPA Partner
b. Complete a memo for the tax files. TAX FILE MEMORANDUM DATE: January 27, 2022 FROM: Jennifer Sampson SUBJECT: Tax consequences for Trevor Pickard if he does not file an insurance claim for reimbursement for damages to his business use car. If an insurance claim is filed, Trevor will have a deductible loss X of $______ This will produce a net cash flow of $_______ If no insurance claim is filed, Trevor will have a deductible loss ✓ of $_____ which will increase x his tax liability by $_____In my correspondence with Trevor, I pointed out that the net cash benefit from filing an insurance reimbursement claim would be $_______