Final answer:
Depreciation recapture on the sale of a machine is classified as ordinary income for tax purposes. This gain reflects the recapture of depreciation deductions taken in previous years and is taxed at ordinary income tax rates rather than the lower capital gains rates.
Step-by-step explanation:
When an asset like a machine is sold, the gain obtained from the sale can be classified into different types for tax purposes based on the nature of the gain. According to the Internal Revenue Service (IRS), gain recaptured under depreciation recapture rules is considered as ordinary income. This occurs because the gain is essentially a recapture of all or part of the deductions that the taxpayer previously enjoyed through depreciation.
Under Section 1245 of the Internal Revenue Code, when depreciable property is sold, the depreciation that has been claimed on the property must be 'recaptured' by including it as ordinary income. This is because depreciation is a way to allocate the cost of an asset over its useful life for tax purposes, and when the asset is sold for more than its depreciated value (but less than or equal to its original cost), the excess is treated as ordinary income to the extent of depreciation taken to prevent the taxpayer from taking double tax benefit.
In the event that the sale price exceeds the original cost of the asset, the additional gain is typically treated as a capital gain. This treatment is important for tax calculations because ordinary income is taxed at higher rates than capital gains. However, for the purpose of answering the question, gain recaptured as a result of depreciation should be classified as ordinary income.