Depreciation Recapture Planning refers to the strategy of managing the tax consequences associated with the sale of an asset that has previously been depreciated.
When an asset is sold for more than its adjusted basis (original cost minus accumulated depreciation), the Internal Revenue Service (IRS) requires that the gain attributable to depreciation be "recaptured" as ordinary income, rather than capital gain, which is typically taxed at a lower rate.
This planning involves analyzing the timing of asset sales, potential reinvestment strategies, and the impact of depreciation methods on tax liabilities.
For example, if a business sells machinery that was purchased for $100,000 and has accumulated depreciation of $70,000, the adjusted basis is $30,000. If the machinery is sold for $50,000, $20,000 of the gain will be subject to depreciation recapture, taxed as ordinary income. Depreciation recapture planning helps taxpayers minimize their overall tax burden through strategic timing and asset management.
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