Section 291 Recapture Explained CPA/EA Exam

What is Section 291 depreciation recapture and how does it apply to corporations on the CPA REG exam? This lesson explains why a C corporation recaptures more depreciation than an individual on Section 1250 real property, and walks through the formula: 20 percent of the excess of potential Section 1245 recapture over actual Section 1250 recapture is treated as additional ordinary income — a core REG topic for CPA and EA candidates and accounting students. Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students. Video Timeline & Key Concepts: 0:00 — Introduction to Section 291 0:44 — The concept: extra 20 percent recapture for corporations 2:23 — Worked example with the sale of an office building 2:36 — Step 1: determine the recognized gain 3:28 — Step 2: potential Section 1245 recapture (lesser of gain or depreciation) 4:07 — Step 3: Section 1250 recapture, often zero on straight-line real property 4:40 — Step 4: apply the Section 291 formula for additional ordinary income Frequently Asked Questions: What does Section 291 do? Section 291 requires a C corporation to treat part of the gain on the sale of depreciable real property as ordinary income rather than Section 1231 gain. It effectively recaptures more depreciation than the rules that apply to individuals. How is the Section 291 amount calculated? Take the depreciation that would be recaptured if the property were Section 1245 property, subtract the actual Section 1250 recapture, and multiply the difference by 20 percent. That result is additional ordinary income. Why is Section 1250 recapture often zero? For real property placed in service after 1986 and depreciated using the straight-line method, there is generally no excess depreciation, so ordinary Section 1250 recapture is zero. Section 291 then applies to the difference. Does Section 291 apply to individuals? No. Section 291 is a corporate provision. Individuals are subject to the regular Section 1245 and Section 1250 recapture rules but not the additional 20 percent corporate recapture. What type of gain becomes ordinary income under Section 291? The portion computed under Section 291 is recharacterized from Section 1231 gain into ordinary income. The remaining gain generally keeps its Section 1231 character and may be taxed at more favorable rates. #CPAexam #CMAexam #enrolledagentexam #accountingcourses #collegecourses #courses #REG #Section291 #depreciationrecapture #corporatetax #ProfessorFarhat #accountingstudents