Recapture ─ Selling Business Assets

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)

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

Basis, Business Basis, Tax (Adjusted) Basis - Defined

Basis: Generally the cost of your item, increased by sales tax and improvements.

Business Basis: Multiply the basis of your item by the percentage you use the item for business purposes. The result is your business basis of the item.

Tax Basis (Adjusted Basis): Your basis, reduced by any Section 179 or other depreciation you have ever taken on the item for tax purposes.

Examples:

Joel has a computer. To figure his basis, he needs to know what he paid for it (plus sales tax). He paid $1000. $1000 is his basis.
(Improvement) He adds a larger hard drive to the computer for a cost of $100. His basis is now $1100 (1000 + 100).

Joel only uses the computer , with the larger hard drive, 70% for business purposes. His basis is $1100. But, his business basis is $770 (1100 - 70%).

When he is ready to sell the computer, he will need to know his tax, or adjusted, basis. Over the years, he has depreciated the computer using straight-line depreciation. The amounts he has taken thus far, add up to $440. He subtracts that from his $1100 basis. His tax basis becomes $660.

His basis is $1100. His business basis is $770. His tax basis is currently $660.

If Joel had never taken any deductions on his computer, his tax basis would be his basis, reduced by the amount he could have depreciated it using straight-line depreciation tables.

This and other information may be found in the book listed below.
Permission to use or excerpt with proper attribution.
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