Suppose you lost your wallet and after few days someone returns your lost wallet than that feeling of happiness is different because in your mind you had identified lost wallet as a loss but due to someone returning your lost wallet that loss remained in your mind only and not turned into an actual loss. In the case of companies when a company sets provision for deprecation than in the books of company it can be termed as expense but sometimes company is able to sell its assets at a price which is above the depreciated value of the asset and this difference from the sale of asset over and above the depreciated value of the asset is called recaptured depreciation. In order to have a better understanding of this concept, one should look at formula and example of recaptured depreciation –
Recaptured Depreciation Formula
The formula for calculation of recaptured deprecation is Recaptured depreciation = Selling price of the asset – Deprecated value of the asset where the depreciated value of assets is calculated as the original cost of the asset less deprecation on the value of assets over the years.
Recaptured Depreciation Example
In order to understand about this concept, one should look at the example of recaptured depreciation, suppose a company has purchased machinery worth $50000 and deprecation method is straight-line method and deprecation rate is 10 percent than yearly deprecation will be $5000. Suppose after 5 years company sell the machinery in $30000 and in 5 years the accumulated deprecation will be $25000 and the depreciated value of an asset will be $50000 – $25000 = $25000, since the company has sold the machinery in $30000 than recaptured deprecation will be $5000.
According to IRS recaptured deprecation is lower of the gain realized by the company from selling the asset or total deprecation expense, in the above case since total deprecation is $30000 Company will consider $5000 as recaptured deprecation and this amount will be taxed as ordinary income when the company files a tax return. It should be noted that if company sell the asset at below the depreciated value of asset than there will be no recaptured depreciation, hence in the above example if the company had sold the machinery at $20000 then there will be no recaptured depreciation on the sale of the machinery.