Recapture ─ Selling Business Assets
The most common way to dispose of equipment used in your business is by selling it. When you sell that asset, however, you will create income from the proceeds you realized on the sale.
If you have taken any Section 179 deductions or depreciation on the equipment, you may be subject to what is called a recapture tax. Don’t let this scare you. It is not as bad as it sounds. It simply means a portion of the income you receive from the sale may be taxed as ordinary income, which you might have assumed anyway. Let’s see how it works.
First we need to figure your tax basis in the item. You figure this by subtracting any Section 179 deductions or other depreciation you have taken on that item over the years, from your investment in it. (Your investment is usually what you paid for it when you purchased it.) The result is your tax (or adjusted) basis.
If you never took any Section 179 deductions or depreciation on the item, you figure your tax basis using the amount of depreciation that would have been allowable had you depreciated it using the straight-line method. Consider the number of years and the amount you could have taken based on the year you purchased and put the asset into use in the business.
How much money did you receive from selling the asset? Subtract your tax basis from the amount received (amount you sold it for). The result is your total loss or gain.
Any amount of profit produced from selling an asset, above your tax basis, up to the amount you were allowed to depreciate, is taxed at ordinary income tax rates. Any amount over that is taxed at (generally more favorable) long-term capital gains rates, unless you have Section 1231 losses from previous years which need to be figured first. (Chapter 8 – Taxes for Online Sellers)
The most common way to dispose of equipment used in your business is by selling it. When you sell that asset, however, you will create income from the proceeds you realized on the sale.
If you have taken any Section 179 deductions or depreciation on the equipment, you may be subject to what is called a recapture tax. Don’t let this scare you. It is not as bad as it sounds. It simply means a portion of the income you receive from the sale may be taxed as ordinary income, which you might have assumed anyway. Let’s see how it works.
First we need to figure your tax basis in the item. You figure this by subtracting any Section 179 deductions or other depreciation you have taken on that item over the years, from your investment in it. (Your investment is usually what you paid for it when you purchased it.) The result is your tax (or adjusted) basis.
If you never took any Section 179 deductions or depreciation on the item, you figure your tax basis using the amount of depreciation that would have been allowable had you depreciated it using the straight-line method. Consider the number of years and the amount you could have taken based on the year you purchased and put the asset into use in the business.
How much money did you receive from selling the asset? Subtract your tax basis from the amount received (amount you sold it for). The result is your total loss or gain.
Any amount of profit produced from selling an asset, above your tax basis, up to the amount you were allowed to depreciate, is taxed at ordinary income tax rates. Any amount over that is taxed at (generally more favorable) long-term capital gains rates, unless you have Section 1231 losses from previous years which need to be figured first. (Chapter 8 – Taxes for Online Sellers)
This and other information may be found in the book listed below.
Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com/
Copyright 2007 -2008
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com/
Copyright 2007 -2008
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