Which of the following is true regarding depreciation recapture?

• A. Depreciation recapture occurs when the sale of an asset results in a gain due to previously claimed depreciation deductions.
• B. Depreciation recapture only applies to intangible assets such as patents and copyrights.
• C. Depreciation recapture increases the depreciable base of an asset for future periods.
• D. Depreciation recapture allows a company to avoid paying taxes on gains from asset sales.

Answer: (A)

Verified step by step guidance

1. Understand the concept of depreciation recapture: Depreciation recapture occurs when an asset is sold for more than its adjusted basis (original cost minus accumulated depreciation). The gain attributable to the depreciation deductions previously claimed is 'recaptured' and taxed as ordinary income, not as a capital gain.
2. Analyze the first statement: 'Depreciation recapture occurs when the sale of an asset results in a gain due to previously claimed depreciation deductions.' This is correct because depreciation recapture specifically addresses the portion of the gain that arises from prior depreciation deductions.
3. Analyze the second statement: 'Depreciation recapture only applies to intangible assets such as patents and copyrights.' This is incorrect because depreciation recapture applies to tangible assets (e.g., machinery, equipment, buildings) and not exclusively to intangible assets.
4. Analyze the third statement: 'Depreciation recapture increases the depreciable base of an asset for future periods.' This is incorrect because depreciation recapture does not affect the depreciable base of an asset; it is a tax concept applied at the time of sale.
5. Analyze the fourth statement: 'Depreciation recapture allows a company to avoid paying taxes on gains from asset sales.' This is incorrect because depreciation recapture ensures that taxes are paid on the portion of the gain attributable to prior depreciation deductions, rather than avoiding taxes.