Reference no: EM132672027

Problem - Depreciation Recapture

Hazel Brown (a sole proprietor filing a Form 1040 Schedule C) owns and operates a retail arts and crafts store. She has some four-year-old snow removal equipment with a $1,000 tax basis. Next to her store is a small lot that she bought several years ago for $15,000 to expand the store's parking lot. In 2016, she remodeled the store and replaced the store's equipment (counters, display racks, etc.), at a cost of $450,000, with used equipment that she bought from a competitor. The equipment is 7-year MACRS property. That year, she claimed $250,000 of § 179 expense on it and depreciated the balance. She did not expense the entire $450,000 (the maximum § 179 deduction in 2016 was $500,000) because she expected to be in a higher tax bracket in later years and wanted to "save" some of the depreciation. As of June 30, 2019, the equipment has an adjusted basis of $74,960 ($450,000 cost 2 $250,000 § 179 expense 2 $125,040 of regular MACRS depreciation). Now Hazel is again planning to replace the store's equipment, and she has determined that she can sell all of the existing equipment for $128,000.

Required - If Hazel completes this transaction, what will be the impact on her 2019 tax return?