In tax treatment, the rules of bonus depreciation and recapture upon asset sale often confuse taxpayers. The following uses a specific case to explain the relevant calculation logic.

Case Background

Assume a taxpayer purchased an SUV worth $60,000 in 2018. The vehicle has a gross weight exceeding 6,000 pounds and is used 100% for business purposes. Under the 2018 tax law, the taxpayer can apply bonus depreciation to the entire cost of the vehicle, meaning a full deduction of $60,000 in that year.

Subsequently, the vehicle was sold in December 2019 for $45,000. At this point, the taxpayer needs to determine whether a recapture amount arises and whether that amount should be treated as ordinary income or capital gain.

Calculation Logic of Recapture Amount

According to the IRS rules on depreciation recapture, when the sale price of an asset exceeds its adjusted tax basis, the excess must be recaptured as ordinary income, up to the total amount of depreciation previously deducted. In this case:

  • Original Cost:$60,000
  • Depreciation Deducted (Bonus Depreciation):$60,000 (fully deducted in 2018)
  • Adjusted Tax Basis:$0 (cost minus depreciation deducted)
  • Sale Price:$45,000

Since the sale price ($45,000) is higher than the adjusted tax basis ($0), the difference is $45,000. However, the recapture amount is capped at the total depreciation deducted, which is $60,000. Therefore, the recapture amount is $45,000, all of which is taxed as ordinary income.

Why Is There No Capital Gain?

Under standard depreciation recapture rules, if the sale price of an asset exceeds its original cost, the excess may be treated as capital gain. However, in this case, the sale price ($45,000) is lower than the original cost ($60,000), so there is no capital gain. All amounts exceeding the adjusted tax basis are depreciation recapture and are taxed at ordinary income tax rates.

Important Notes

It should be emphasized that the above calculation is based on the rules for applying bonus depreciation under the 2018 tax law and assumes no other adjustments (such as additional investments or partial dispositions) occurred before the sale. Additionally, if the vehicle was sold in 2019, depreciation for 2019 would need to be considered (if applicable), but in this case, since it was fully deducted in 2018, there is no additional depreciation in 2019.

Tip: For actual tax filing, be sure to consult a professional tax advisor and refer to IRS Publication 946 (How to Depreciate Property) and Form 4797 (Sales of Business Property) instructions.

In summary, in this scenario, the taxpayer must report the $45,000 sale proceeds as ordinary income, not as capital gain. This outcome reflects the "deduct first, recapture later" nature of bonus depreciation, where accelerated depreciation deducted in earlier years is recaptured as ordinary income upon asset disposition.