On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
- Replacing a Business Vehicle
- Selling the Old Vehicle at a Loss
- Trade-in is Treated as an Exchange
- Prorate if Used for Business and Personal
As the end of the year approaches, business owners may be thinking about replacing a business vehicle. Profits from the business may be up, so the timing may be right to acquire a new vehicle, or the current vehicle may finally be on its last legs. A question then comes up: Is it better to sell the current vehicle outright or trade it in for a new vehicle?
When replacing a business vehicle, it does make a difference for tax purposes if you decide to sell or trade it in for the replacement vehicle. If you sell a vehicle, the resulting gain or loss is reported on your tax return. As a result, it is generally better to sell a vehicle if the disposition of the vehicle will result in a loss. Since trade-ins are treated as an exchange and any gain or loss is absorbed into the replacement vehicle’s depreciable basis, it is generally better to trade in a vehicle that would result in a gain.
As an example, suppose you sell your business vehicle for $12,000. Your original purchase price was $32,000, and $17,000 has been taken in depreciation. As illustrated below, the sale results in a loss, so it generally would be better for you to sell the vehicle and deduct the loss rather than trading in the vehicle.
On the other hand, had you sold the business vehicle for $16,000, the sale would result in a $1,000 taxable gain and trading it in would be a better option.
If the vehicle is used for both business and personal purposes, the loss or gain must be prorated for the business use. No loss would be deductible on the personal portion.
Since trade-in values are generally lower than the actual sales value of the vehicle, the trade-in decision must also consider whether the tax benefits exceed the additional money that might be received from selling the old business vehicle.
This concept can also be used when selling or disposing of other business assets.
If you are planning to replace a business vehicle and would like to discuss how its disposition and the purchase of a new vehicle will affect your tax situation, please give this office a call.