Which of the following statements is correct regarding depreciation recapture? Select one: Oa. Depreciation recapture only applies to individual taxpayers. ? b. Depreciation recapture only applies to corporate taxpayers. ?c. There are no circumstances where depreciation is recaptured under current tax laws. ?d. There is no depreciation recapture when property is sold at a loss. ?e. None of the above.
The Correct Answer and Explanation is:
The correct answer is d. There is no depreciation recapture when property is sold at a loss.
Explanation:
Depreciation recapture refers to the process by which the Internal Revenue Service (IRS) taxes the portion of the gain on the sale of depreciable property that was previously claimed as depreciation. Here’s why option “d” is correct:
- Depreciation Recapture in General: Depreciation recapture applies when property that has been depreciated (e.g., equipment, real estate) is sold for more than its adjusted basis (original cost minus depreciation). The IRS recaptures this depreciation, meaning that the taxpayer must report it as ordinary income instead of capital gains. The tax rate for this recaptured depreciation could be higher, depending on the type of asset.
- Losses and Depreciation Recapture: When property is sold at a loss, no gain is realized. Depreciation recapture applies only when there is a gain on the sale. Since a loss means the sales price is less than the adjusted basis, there is no income to “recapture” or tax. Therefore, depreciation recapture does not apply when the property is sold at a loss.
Why the Other Options are Incorrect:
- Option “a” (Depreciation recapture only applies to individual taxpayers): This is incorrect because depreciation recapture applies to both individual and corporate taxpayers. Any taxpayer who disposes of depreciable property may be subject to depreciation recapture.
- Option “b” (Depreciation recapture only applies to corporate taxpayers): This is incorrect because, as mentioned, depreciation recapture applies to all taxpayers, not just corporations. Both individual and corporate taxpayers can be subject to recapture.
- Option “c” (There are no circumstances where depreciation is recaptured under current tax laws): This is incorrect because depreciation recapture is very much a part of current tax laws and applies when there is a gain on the sale of depreciated property.
- Option “e” (None of the above): This is incorrect because option “d” correctly describes a situation where depreciation recapture does not apply.
In conclusion, depreciation recapture does not occur when property is sold at a loss because there is no gain for the IRS to tax as recaptured depreciation.
