Depreciation recapture

Definition

Gain taxed as ordinary income because it reverses past depreciation.

Why It Matters

It raises the seller's tax bill in an asset deal, part of why sellers push for stock sales, so the structure is a price negotiation and not just paperwork. The same allocation that creates it gives the buyer a stepped-up basis to depreciate, which means the two sides are trading a real tax cost against a real tax benefit line by line. Expect the split of the price across equipment, goodwill, and a non-compete to be negotiated in its own right, because each bucket lands differently on both tax returns.

In numbers: Equipment bought for $150k, depreciated to $50k and sold for $150k recaptures all $100k of that depreciation as ordinary income at the seller's own rate; the 25% ceiling applies to depreciation on buildings, not equipment.