What does 'recapture' refer to in tax terms?

In tax terminology, 'recapture' specifically refers to the process where certain tax benefits that were previously received must be included in income for the current tax period. This typically occurs in the context of depreciation or certain tax credits that are granted when an asset is placed in service. When that asset is disposed of or no longer meets the criteria for the credits or deductions that were initially claimed, the taxpayer is required to 'recapture' those benefits, resulting in an increase in taxable income.

For example, if a business received tax deductions for depreciation on a property and then sold that property, any gain resulting from the depreciation previously deducted might need to be recognized as ordinary income. This concept ensures that tax benefits are only utilized as long as the qualifying conditions are met. The obligation to include these prior year benefits in the current income effectively increases the taxpayer's tax liability for the year in which the recapture occurs.

Understanding recapture is crucial for taxpayers who invest in depreciable assets or utilize tax credits, as it impacts their overall tax obligations significantly when those assets are sold or otherwise disposed of.