Assume that you purchased a business machine for 100000 and depreciated 20000

Assume that you purchased a business machine for

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Assume that you purchased a business machine for $100,000 and depreciated $20,000 during the first year o Depreciation offsets ordinary income. This means that the $20,000 depreciation will yield a tax benefit at 25% o The next year you sell the machine for $115,000. This results in a gain of $35,000. This $35,000 would normally be taxed at 15%, but remember that the first $20,000 of that gain went to offset ordinary income at 25%. Therefore, we will recapture the first $20,000 of that gain and tax it at ordinary rates (25%). Only the excess gain ($15,000) will qualify for the reduced 15% rate. Section 1245 Depreciation Recapture o Purpose – To prevent taxpayers from receiving the full benefits of accelerated depreciation, but at the same time receive long term capital gain treatment o Type or Property – Section 1245 is a subcategory of Section 1231. It includes depreciable personal property. o Ordinary income is recognized to the extent of total depreciation taken (not to exceed recognized gain) o Excess recognized gain is treated as Section 1231 gain o All losses are treated as Section 1231 losses Susan Songbird Example o Basis is $650 o Section 1231 Gain of $400 o Answer = B
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1231 Recapture
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  • Fall '14
  • fabioambrosio
  • Accounting, Business, Capital gains tax in the United States

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