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When you take bonus depreciation on a property in a business then sell the business does depreciation get recaptured?

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March 20, 2024

Yes, when you take bonus depreciation on a property in a business and then sell the business, the depreciation, including the bonus depreciation, can be subject to recapture. Depreciation recapture is a tax provision that allows the IRS to collect taxes on any profitable sale of property that had previously benefited from depreciation deductions. Specifically, the portion of the gain on the sale attributable to the depreciation deductions (including bonus depreciation) taken during the period you owned the property is recaptured, or taxed, as ordinary income up to the maximum recapture limits.

For most tangible personal property (like equipment and machinery) and certain real property, the recapture rules under Section 1245 of the Internal Revenue Code apply, which generally require that the depreciation claimed be recaptured as ordinary income to the extent of any gain realized on the sale. For real estate, Section 1250 provides guidance on recapture related to depreciation, but typically, real estate is depreciated using the straight-line method, which may result in different recapture implications compared to property depreciated with accelerated methods or bonus depreciation.

However, it's important to note that the recapture rules can be complex and may vary depending on the specific type of property, how it was depreciated, and the nature of the sale. For instance, special recapture situations can arise with bonus depreciation and Section 179 deductions, as mentioned in the context information. Therefore, it's advisable to consult with a tax professional or accountant who can provide advice based on the specific details of your situation.

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April 10, 2024

Yes, to claim past unclaimed depreciation, a taxpayer typically needs to file Form 3115, Application for Change in Accounting Method. This form is used to request a change in either an overall method of accounting or the accounting treatment of any item. When it comes to depreciation, if a taxpayer has not claimed depreciation or has claimed incorrect amounts in the past, filing Form 3115 allows them to correct this error for prior years without needing to amend those years' tax returns.Form 3115 is particularly useful for making corrections related to depreciation because it allows for adjustments to be made across multiple years in one action. This process can correct both over-depreciation and under-depreciation issues. If there is a positive Section 481(a) adjustment (which means previously unclaimed depreciation is now being claimed, thus increasing taxable income), the taxpayer can spread the additional income (and thus the additional tax) over four years, making the correction more financially manageable.It's important to note that changes in depreciation methods, periods of recovery, or conventions are among the types of changes that can be made automatically with the IRS's consent through Form 3115, as long as the taxpayer follows the required procedures outlined by the IRS. This includes properly completing and filing Form 3115 according to the IRS's instructions and applicable revenue procedures.Therefore, if a taxpayer discovers that they have not claimed depreciation or have claimed it incorrectly in past years, filing Form 3115 is a recommended step to correct those errors, subject to IRS rules and procedures.

April 10, 2024

The Sec 6511 statute of limitations on tax refunds is a set of rules defined by the Internal Revenue Code that determines the time frame within which a taxpayer can claim a credit or refund for overpaid taxes. This statute serves two main purposes:1. Defines the Time Frame for Filing a Claim or Amended Return: It specifies how long an individual has to file a claim for a refund or an amended return after the original return was filed or the tax was paid.2. Limits on Claims Depending on Circumstances: It sets limits on the amount of refund or credit that can be claimed, based on certain conditions.Here's a simplified breakdown of the general rules as per Sec 6511:- Filing Deadline: A taxpayer must file a claim for a refund within the later of two periods: - Three years from the time the original return was filed, or - Two years from the time the tax was paid. If no original return was filed, the claim must be filed within two years from the time the tax was paid.- Limitations on the Amount of Refund: - If the claim is filed within the three-year period, the amount of the refund cannot exceed the portion of the tax paid during the three years immediately preceding the filing of the claim, plus the period of any extension for filing the return. - If the claim is filed after the three-year period but within two years from the time the tax was paid, the refund cannot be more than the tax paid within the two years immediately before the claim was filed. - If no claim was filed, the refund amount is limited to what would be allowable as if a claim had been filed on the date the refund is allowed.Exceptions and Special Cases:- The statute also accounts for exceptions such as bad debts, worthless securities, foreign tax paid or accrued, carryback of Net Operating Losses (NOLs), and certain business credits, or claims based on an agreement with the IRS extending the period for assessment of tax.- Additionally, the time periods for claiming a refund are suspended for taxpayers who are "financially disabled" — unable to manage their financial affairs due to a significant physical or mental impairment.This statute is crucial for taxpayers to understand because it limits the time frame for claiming refunds, ensuring that claims are made within a reasonable period after taxes are paid or returns are filed.

March 29, 2024

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