The assets would be considered removed from service, not literally disposed of. They are not sold, but in your hands they carry the same character as they did in the business venture. If it's not Section 179, or listed property or property where special bonus depreciation was used, there is recapture unless you sell it. Review the detailed information below.
Under section 1245, which applies to depreciable personal property such as equipment, furniture and fixtures that is disposed of at a gain, all depreciation taken on the property (including section 179 and bonus depreciation) is subject to recapture. This does not apply to real property (land, buildings or their structural components).
Listed property is basically any type of property that is easily converted from business to personal use and is on an IRS list. When business use drops to 50% or less recapture if required. Examples are cars, computers, cell phones.
You must report the recapture amount of a prior-year Section 179 deduction as income if any of the following occurred before the asset's recovery period (or useful lifespan as defined by the IRS) was up:
- You stopped using the asset in your business
- Business use of the asset fell below 50%
- You sold or otherwise disposed of the asset
- The asset was stolen or subject to a casualty
The amount you report as income is the portion of the deduction that would have remained had you used standard depreciation instead of Section 179. This is known as Section 179 recapture. For more information, refer to IRS Publication 946, How to Depreciate Property.
If, however, you sell any of the business assets at any point they will have the same cost basis as they had under the business.
The cost basis in your hands must account for depreciation previously expensed or allowed to be expensed under the business. Example would be an asset cost $1,000 and the depreciation or full amount used as an expense is $1,000 which leaves a basis of zero. All the sale proceeds would be taxable and up to $1,000 would be taxed at your marginal tax rate. Anything above that would be taxed at the maximum capital gain if applicable.
This would be a draw from the business attributable to you. If you did not take advantage of the Section 179 or bonus depreciation, there is no tax consequence until you sell them. At that time it will be reported on your personal return.
