the last project turns out good, Let me know if you can do this one.

please review, fix and present the answer in essay format of three parts Facts, Statement of law, and discussion. please see attached file. thanks

Facts: One of your client BC LLC bought an apartment complex on 01/01/2004. Total Cost of apartment including land was $8,726,210. Accumulated Depreciation as of 12/31/2014 was 4,513,597. BC refinanced the entire loan in 2009. Loan origination cost in 2009 was 333,777 and as of 12/31/2014 accumulated loan amortization was 109,934. Mortgage balance on 12/31/2014 was 3,689,932. On June 1, 2015 A tornado hit the apartment complex and caused a considerable damage. Half the units became inhabitable. BC returned the security deposits of the tenants and the tenants moved out. Only half of the units were rented out since July 1, 2015. The insurance company so far has paid $2.5 million. BC is expected to receive in 2016 $1,000, 000 for loss of rental income and damage to property BC paid $721,000 for asbestos removal during 2015 and paid to 3% of $2.5 million to adjuster in 2016. BC also paid 22,000 for environmental cleanup in 2015. Required: 1. How to account for $2.5 million payment from Insurance Company 2. How and when to claim expenses for environmental cleanup and asbestos removal 3. How much depreciation to claim in 2015 and 2016. Statement of law: Pub 547- https://www.irs.gov/pub/irs-pdf/p547.pdf Business or income-producing property: If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV isn't considered. Your loss is figured as follows: Loss = adjusted basis in property - salvage value - any insurance/reimbursement you receive/expect to receive Basis adjustment due to casualty loss: If you reduce the basis of your property because of a casualty, you can-not continue to use the percentage tables. For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. See Figuring the Deduction Without Using the Tables, later. Cost of cleaning up or making repairs: The cost of repairing damaged property isn't part of a casualty loss. Neither is the cost of cleaning up after a casualty. But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. The repairs are actually made. The repairs are necessary to bring the property back to its condition before the casualty. The amount spent for repairs isn't excessive. The repairs take care of the damage only. The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. Insurance and Other Reimbursements If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. You don't have a casualty or theft loss to the extent you are reimbursed. If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. You must reduce your loss even if you don't receive payment until a later tax year. See Reimbursement Received After Deducting Loss , later. Pub 551 Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. To make this determination, compare the repaired property to the property before the casualty. For more information on casualty and theft losses, see Pub. 547. http://www.ccim.com/cire-magazine/articles/irs-reevaluates-environmental-cleanupcosts-and-partnership-abuses/?gmSsoPc=1 Ordinary and necessary expenses paid or incurred in carrying on a trade or business are generally de-ductible by the taxpayer. Some expenses may occur only once in the lifetime of a business; however, they may still qualify as ordinary and necessary if they are appropriate and helpful in carrying on the business, are commonly incurred in the type of business conducted by the taxpayer, and do not qualify as capital expenditures. Section 162 of the Internal Revenue Code allows the costs of removing and disposing of waste materials produced in a taxpayer's business to be deducted as a business expense. Under 263, capital expenditures are generally not deductible. This section forbids deductions for permanent improvements made to increase the value of property. Furthermore, no deduction is allowed for expenditures made to restore property or to make good the wear and tear for which a deduction for depreciation, amortization, or depletion has been allowed. The Income Tax Regulations define capital expenditures to include amounts paid or incurred to add to the property's value, prolong its useful life, or adapt it to a new or different use. Under these regulations, capital expenditures include the costs of acquisition, construction, or erection of buildings; machinery and equipment; furniture and fixtures; and similar property with life substantially beyond the tax year. Taxpayers should also capitalize the direct and indirect costs allocable to the real or tangible personal property they produced. In summary, the taxpayer can deduct as ordinary and necessary business expenses the costs incurred to clean up land and to treat groundwater that a taxpayer's business contaminated with hazardous waste. Costs that are properly allocated to constructing the groundwater treatment facilities or that otherwise increase the property's value are capital expenditures. This is applicable whether the taxpayer plans to continue the manufacturing operations that discharged the hazardous waste or to hold the land in an idle state. http://www.nolo.com/legal-encyclopedia/landlord-tax-deductions-environmentalcleanup-costs.html Historically, the IRS had held that remediation of such preexisting environmental hazards is an improvement that must be depreciated. The rationale for this rule was that the remediation does not restore the property to its original condition when purchasedrather, it makes the property more valuable and it may also prolong its useful life. For example, the IRS ruled that the cost of removing asbestos insulation in manufacturing equipment and replacing it with new insulation was an improvement. (PLR 9240004 (June 29, 1992).) In recent years, the IRS has softened its position somewhat, ruling that a manufacturer could currently deduct the cost of removing wastes in underground storage tanks, even though the removal process required the construction of new storage tanks. (Rev. Rul. 98-25.) The IRS also permitted the cost of encapsulating exposed asbestos in a warehouse to be deducted as a repair because encapsulation left the asbestos in place, instead of removing it. (Technical Advice Memo. 94-11-002 (November 19, 1993).) But these rulings have not presaged a wholesale change in the IRS's view as some hoped. The IRS still says that \"environmental cleanup costs are generally capital expenditures\"that is, they are improvements that must be depreciated. (IRS Publication 535, Business Expenses.) Moreover, new IRS regulations provide that expenses to ameliorate a "material condition or defect" that existed before the owner purchased the property must be depreciated. This is so whether or not the owner knew about the environmental problems when the property was purchased. Arguably, environmental remediation of hazardous substances such as lead paint or asbestos should be a repair because it usually does not add value to the property or prolong its useful liferather, it restores lost property value due to subsequent discoveries about the dangers of exposure to such substances. In other words, the building is restored to its original conditiona building that, according to the latest health standards, is safe to use. However, neither the IRS nor the courts have accepted this argument. http://www.journalofaccountancy.com/issues/2002/feb/deductingenvironmentalcleanupc osts.html Environmental remediation costs can be deductible trade or business expenses under IRC section 162. However, under IRC section 263, businesses must capitalize expenditures that increase a property's value or its useful life or adapt it to a different use. The tax treatment of specific remediation costs is determined by the facts and circumstances of the situation. The Sixth Circuit enumerated a three-pronged test taxpayers must satisfy to currently deduct environmental cleanup costs: The taxpayer contaminated the property by its business operations. The taxpayer returned the property to its previous clean condition. The cleanup did not permit the taxpayer to use the property in a new way. - See more at: http://www.journalofaccountancy.com/issues/2002/feb/deductingenvironmentalcleanupc osts.html#sthash.IB2PmlFY.dpuf Discussion: 1. How to account for $2.5 million payment from Insurance Company? 1. The insurance claim of $2.5 million should be debited tornado damage and credited Loss on building account. The reimbursement amount on the property at fair market value at the time it was destroyed. 2. The $2.5 million received from the insurance company should be accounted for as follows: Debit Cash with the full amount received and credit Fixed Assets with the amount of the apartment units lost following the tornado (50% in this case). If the $2.5 million falls short of the value of the property lost, the difference between the value of the property lost and $2.5 million should be debited to a loss account, that is, Loss on Insurance Proceeds. If the $2.5 million insurance proceeds are more than the value of the property lost, the surplus should be credited to a gain account, that is, Gain from Insurance Proceeds. b. How and when to claim expenses for environmental cleanup and asbestos removal? 1. The environmental cleanup expenses should be claimed only when it has been incurred by the company. 2. In accordance with the accrual accounting principle, the expense on environment cleanup as well as removal of asbestos should be recognized in the period in which the event has taken place rather than when the cash is actually paid. Thus, considering quarterly payment, the expense on these items shall be recognized in the 2nd quarter. Similarly in case of monthly treatment, the expense shall be recognized in June. b. How much depreciation to claim in 2015 and 2016. 1. For the first year, depreciation expense should be claimed in full and in subsequent years 50% will be claimed on building. 2. For the first year, depreciation expense should be claimed in full and in subsequent years 50% will be claimed on building. 3. Amount of depreciation to claim in 2015 Applying the straight line method of calculating depreciation over the past 10 years, the accumulated depreciation ( ... ). Therefore, annual depreciation (,,, ) . Half of the apartment units were lost in 2015. Consequently, the firm can claim depreciation only on the property that was destroyed (half). The rationale is that the destroyed property is removed from the company's books and has already been recognized as a loss in the income statement. Hence, the depreciation to be claimed in 2015= (,,,) 01/01/200 4 $8,726,21 0 C/D $4,212,613 01/01/201 5 $4,212,61 3 C/D $4,024,547 01/06/201 5 $4,024,54 7 31/12/14 Depreciation $4,513,597 1/6/2015 (451359.7X5)/12 $188,066 Damage 2,012,273 Depreciation (5.1% X 2012273 X 7)/12 $59,865 Notes from class: Casualty loss- when do you claim it in 2015 or 2016 Amount Depreciation-how do you go about figuring out depreciation Insurance reimbursement 2 years??? Environmental clean up Conditions meet to calculate depreciation- cost, useful life, is it being used or not In 2015 how much property is in service? 50% January-June 2015 full depreciation Can only take half of remaining depreciation after june Same for 2016 only take half of the depreciation