Question

On January 2, 2015, Bates Corp. purchases and places into service seven-year MACRS tangible property costing $100,000. On December 31, 2019, Bates sells the property for $102,000, after having taken $47,525 in MACRS depreciation deductions. What amount of the gain should Bates recapture as ordinary income?

1) $0
2) $2,000
3) $47,525
4) $49,525

Answer 1

Bates Corp. must recapture $47,525 of the gain as ordinary income, which is the amount of the MACRS depreciation claimed on the property sold.

Step-by-step explanation:

When Bates Corp. sells its seven-year MACRS property for $102,000 after having taken $47,525 in MACRS depreciation deductions, the gain on sale is the difference between the selling price and the adjusted basis of the property. The adjusted basis is the original cost minus accumulated depreciation, which in this case is $100,000 - $47,525 = $52,475. Thus, the gain on sale is $102,000 - $52,475 = $49,525.

According to IRS rules, when property depreciated under MACRS is sold, the gain up to the amount of accumulated depreciation must be recaptured as ordinary income. Bates Corp. took $47,525 in depreciation deductions, so that amount must be recaptured and reported as ordinary income. Any remaining gain is treated as a Section 1231 gain, which is subject to capital gains treatment. Therefore, $47,525 of the $49,525 total gain should be recaptured as ordinary income, which makes option 3 the correct answer.