Depreciation Recapture and Selling Your S-Corp at a Loss: What Business Owners Need to Know
Kimberly Green | 2025-10-17
If you're preparing to sell your S-Corporation and feeling overwhelmed by tax jargon like depreciation recapture , you're not alone. Whether you're a restaurant owner retiring after decades or a startup founder winding down, understanding how depreciation impacts your tax bill at sale time is critical. This guide explains depreciation recapture in plain English—especially when selling at a loss—so you can make smarter decisions and avoid surprise IRS bills. Looking for an accountant ? Find specialized accountants, CPAs, bookkeepers, and fractional CFOs on Sam's List ! What Is Depreciation Recapture? When you buy business assets like kitchen equipment, decor, or a liquor license, you can usually write off the cost through depreciation. These deductions reduce your taxable income over time. But when you sell the business (or its assets), the IRS may want some of those deductions “recaptured”—i.e., taxed. Depreciation recapture happens when: You sell an asset for more than its depreciated (adjusted) basis, and The IRS taxes the gain up to the depreciation taken as ordinary income, not lower-rate capital gains. It ensures you don’t get a permanent tax break for assets that ended up increasing in value. Selling at a Loss? Here's the Good News If you’re selling your S-Corp or its assets at a loss, you typically do not owe depreciation recapture. Here’s why: There’s no gain, so there’s nothing to "recapture." But here’s the catch: The IRS doesn’t look at your business sale as one big number. They treat it as the sale of individual assets (in an asset sale). So even if your business sold for less than you put in, some assets might have gains, triggering recapture. Example: Restaurant S-Corp Sale Imagine you started a restaurant 10 years ago: You bought $300,000 in leasehold improvements, kitchen equipment, decor, and a liquor license. Over time, you added another $100,000 in assets. Let’s say $350,000 of those assets are now fully depreciated, and $50,000 still have some basis. You sell everything in an asset sale for $300,000. At first glance, it feels like a loss—you put in $400K+, now you're getting $300K. But for taxes, here’s what matters: The adjusted basis of your assets (what you’ve depreciated vs. not), The allocation of the sale price across assets (equipment, goodwill, etc.). If some fully depreciated items are allocated high sale values, you may owe recapture on those. Additional Example: A depreciated company car originally costing $50,000, now fully...
