What is Section 1250?

A. Leverkuhn
A. Leverkuhn
Man climbing a rope
Man climbing a rope

Section 1250 is a part of the federal tax code used by the Internal Revenue Service (IRS) that governs business and individual income tax return rules. This section of the tax code deals with the depreciation of assets such as vehicles, computer hardware, large pieces of equipment, or anything that the IRS allows to be depreciated over time rather than written off in a lump sum deduction. When it comes to taxes, there are a lot of different parts of the IRS rules that tax preparers help their clients to understand. Section 1250 provides information on how the federal government taxes the sale of some assets that exceed their current value after depreciation.

The IRS uses section 1250 of the tax code in conjunction with other parts of the code such as the Modified Accelerated Cost Recovery System. The MACRS tells businesses how to depreciate each particular kind of asset. Section 1250 tells them how they might be taxed on a “recovered” value after depreciation.

A theoretical business depreciation of an asset can help explain how the provision of section 1250 works. If a business owns a color television that falls under section 1250 that it bought for $1200 and writes off 25% or $300 for depreciation the first year, they are left with a value of $900. If that business sells the TV that year, any revenue above $900 will be taxed as ordinary income, and not the lower tax that generally applies to capital gains. For example, if the business sells the television for $1000, the difference in value of $100 would be taxed at the proper tax rate as “recovered” income.

A similar tax code section, 1231, deals with regular depreciation for certain kinds of business property. In this rule, gains and losses are netted against each other and the profit, if any, is taxed as a capital gain. There’s also section 1245, in which recovered depreciation in an asset sale may be able to qualify for a capital gains based tax rather than the ordinary income tax rate stipulated by section 1250. It’s up to skilled accountants to figure out whether section 1245 or 1250 applies to a particular asset sale.

Skilled taxpayers help businesses minimize their tax liability by sorting out the various language of all of the above sections of the text code. Some preparers qualify as experts with an Enrolled Agent (EA) certification, or other certificates or degrees. Although many businesses of all sizes rely on the counsel of their preparers, it is helpful for leadership of any business, whether it’s a sole proprietorship, LLC, or corporation, to have some knowledge of how to depreciate their assets.

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