On July 24 of the current year, Sam Smith was involved in an accident with his business use automobile. Sam 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. Sam has taken $20,000 of depreciation on the car. The car is insured for the fair market value of any loss. Because of Sam?s history, he is afraid that if he submits a claim, his policy will be canceled. Therefore, he is considering not filing a claim. Sam believes that the tax loss deduction will help mitigate the loss of the insurance reimbursement. Sam?s current marginal tax rate is 35%. Write a letter to Sam 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. Also prepare a memo for the tax files. Sam?s address is 450 Colonel?s Way, Warrensburg, MO 64093.
Please complete the second part of this question to write a tax file memorandum showing the tax consequences and resulting net-cash benefit of filing a claim as opposed to not filing a claim. You do not need to write a letter to Sam. The concern is not about the tax file memorandum formalities, but about the tax rules and their application to these set of facts. Please cite the E-Text reference source pages (attached) for this solution.
550 word minimum, cited APA