In layman's terms what the heck is recapture of depreciation.?

Question

What is depreciating?

And depreciation deductions

Answer 1

ok, let's say that I bought a llama for $10,000 for my business. A farm animal can be depreciated over 5 years, so I can take $2,000 depreciation each year. However, section 179 says that I can take all $10,000 in year 1, so I do that.

In year 3, I decide to sell my llama for $3,000. Since I already took $10,000 of depreciation, but have really only "used" $6,000 ($2,000 * 3 years), I "owe" the government $4,000 of depreciation back - that is the recapture of depreciation.

Answer 2

First, we'll start with what accountants mean when they speak of "depreciating assets". The IRS has set up guidelines regarding how many years a business can expect to keep an asset on the books. Let's say you bought a $3,000 computer. The IRS says that for 3 years, you can take as an expense $1000 per year on your tax return. Now, bear in mind that the IRS sense of how long something will last has apparently no bearing with reality! There are depreciation charts that accountants must use in order to comply with tax law.

Now, on to the next (actually your first!) question. Recapture of depreciation is another tax concept. Here's another example for you: You buy a machine that costs $100,000 with an IRS asset class life of 5 years. The first year you take a full 20% (1/5 of the five year life). The second year you take 32% of the $100,000 value. So, after two years, you've recorded depreciation expense of $57,000 ($25,000 in year one and $32,000 in year two), giving you a "book" value of $47,000 (original asset cost of $100,000 less two years of depreciation at $57,000). So, now you decide in year 3 to sell this asset for $60,000. You have an ordinary gain (not a capital gain) of $13,000. Normally, when you sell a asset, you have a capital gain, but due to the recapture laws, any difference in the selling price and the book value must be considered as ordinary income, unless the gain exceeds the amount of depreciation already taken on the asset. Then, any amount in excess of depreciation would be considered as capital gain.

I hope I haven't confused you even more!

Answer 3

If you buy something for your business, you may be required to depreciate the cost of that asset over many years rather than being allowed to deduct it all in one year as an expense. After you write down (depreciate) the value of that asset on your books, it may be carried on your books at zero (or low) value. If you then sell that item for more than the depreciated value on your books, you have to "recapture" or claim the difference as revenue.

Answer 4

I think it refers to tax write offs of depreciation,but i could be wrong