Depreciation recapture calculated on disposition with gain (1040, 1120C and 1041)

If there's a disposition of an asset, you need to recapture the amount of allowed depreciation as ordinary income. The entire disposition is outlined on Form 4797, Page 2. The total gain is then broken down into ordinary income and capital gain as follows:
  • Depreciation allowed is the amount that must be recaptured as ordinary income. It's reported on Form 4797, Part II, then transfered to Form 1040, Line 14.
  • Any remainder amounts, which is the cost basis minus depreciation allowed, is classified as a capital gain and reported on Schedule D.

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