Depreciation Recapture for Business Property refers to the process by which the Internal Revenue Service (IRS) taxes the gain on the sale of a business asset that has previously been depreciated. When a business sells an asset, any gain realized from the sale is subject to taxation. If that asset has been depreciated over its useful life, the IRS requires a portion of the gain—up to the amount of depreciation taken—to be "recaptured" and taxed as ordinary income rather than capital gains.
For example, if a business purchases a piece of equipment for $10,000 and claims $4,000 in depreciation over several years, the adjusted basis of the equipment is $6,000 ($10,000 purchase price – $4,000 depreciation). If the business then sells the equipment for $8,000, it realizes a total gain of $2,000 ($8,000 sale price – $6,000 adjusted basis). However, since $4,000 of depreciation was previously claimed, the IRS will recapture that amount, and the business will pay ordinary income tax on the $2,000 gain up to $4,000, with any excess potentially taxed at capital gains rates.
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