Karl paid $200,000 for business-use equipment. Using straight-line depreciation, his deduction would have been $22,000, but Karl uses MACRS depreciation and deducts $37,500 for the first two years of usage. At the beginning of the third year, Karl sells the equipment for $190,000. How much of the gain is recaptured under Section 1245 as ordinary income?

Question

Quizplus · Accepted Answer

First, we need to find the adjusted basis of the equipment at the beginning of the third year, which is the original cost minus the total MACRS deductions taken:
$200,000 - $37,500 - $37,500 = $125,000 adjusted basis

Next, we need to find the amount of gain on the sale of the equipment:
Sale price - adjusted basis = gain
$190,000 - $125,000 = $65,000 gain

Since the equipment was used for business purposes, the gain is subject to recapture under Section 1245 as ordinary income. The recaptured amount is the lesser of the gain or the total amount of MACRS deductions taken. In this case, the recaptured amount is $27,500 ($37,500 + $0 - $10,000 because the gain is less than the remaining amount). Therefore, the answer is D) $27,500.

Karl Paid $200,000 for Business-Use Equipment