If your client disposes of depreciation or amortizable property as a gain, part or all of the gain may need to be treated as ordinary income.
When entering the sale or disposition through the Depreciation screen, the program uses the Method entered to determine what type of property the asset is. The program recaptures all depreciation for section 1245 personal property based on MACRS methods (34-69, 88) and ACRS methods (30-63). Refer to Pub 544 to find out what qualifies as section 1245 property.
Follow these steps to enter section 1245 depreciation recapture:
- From the Input Return tab, go to Deductions ⮕ Depreciation.
- Click Details for the applicable asset.
- Under the Depreciation (4562) section, enter the Description of Property.
- Scroll down to the Asset Information section.
- Under the General Information subsection, fill out the applicable fields.
- Under the Regular Depreciation subsection, fill out the applicable fields.
When entering the sale or disposition through the Dispositions screen, the Depreciation allowed (code 30) should include any prior year and current year depreciation for the asset. This number will flow to Form 4797, page 2, line 22.
How much of the gain on the sale or disposition of section 1245 property is treated as ordinary income?
A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Refer to Pub 544 for more information on gain treated as ordinary income.
Can I treat multiple units of section 1245 property as one item to figure ordinary income?
The IRS allows taxpayers to treat any number of units of section 1245 property in a depreciation account as one item so long as the total ordinary income from depreciation figured using this method isn't less than it would be if each unit were figured separately.