One of the more unpleasant surprises that can hit a taxpayer occurs when you sell personal property, rental property or assets from your small business. This tax surprise is often associated with depreciation recapture rules..
* This example is simplified for clarity. Actual depreciation methods used will vary from this example. The ordinary income must be claimed on your tax return and is caused because of the depreciation taken in prior years. This illustrates the recapture of prior period depreciation.
Look for the possibility of depreciation recapture when:
One of the land mines surrounding depreciation recapture rules is the concept of “allowed or allowable.” When calculating whether you owe deprecation recapture related taxes, the tax code requires that you adjust for depreciation whether or not you actually took the depreciation expense in prior years. So if you have assets that should be depreciated on your tax return, but are not, please call for a review of your situation.
First and foremost, many unsuspecting landlords forget that years of depreciation on their property can impact their tax obligation when the property is sold. This can occur even if the sales price is less than what they paid for the property.
Secondly, the tax code applies different tax rates on ordinary income versus depreciation recapture versus long-term capital gains. The maximum tax rates on each are noted here:
Personal income tax: 37.0%
Depreciation recapture: 25.0%
Long-term capital gains: 20.0%
(excludes the impact of possible Affordable Care Act surtax)
Unfortunately, the tax laws in this area are fairly complex. The amount due can be impacted by;
Thankfully, you do not need to understand the complexities surrounding depreciation recapture rules. You simply need to know they exist and ask for assistance.
Article from CK Books & Billing. This article has been reprinted with permission from CK Books & Billing
The ultimate starting point is to find out where your business sits in the market. We've put together a handy Market Range Estimate™ calculator, that will give you a starting point so you can prepare to increase the value for the ultimate day of selling your business.
Get your free MRE™ now! Market Range Estimate™