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.
It does make a difference for tax purposes if you sell or trade-in your business vehicle.
Sell – If you sell it, you will incur either a taxable gain or loss, depending upon the amount you sell the business vehicle for less the undepreciated basis in the vehicle. As an example, suppose you sell your business vehicle for $1,000. Your original purchase price was $12,000, and you have taken $10,000 in depreciation leaving you with an undepreciated basis of $2,000. Subtract the $2,000 undepreciated basis from the sales price and you will end up with a $1,000 loss. On the other hand, had you sold the business vehicle for $3,000, the sale would have resulted in a $1,000 taxable gain.
Trade-in – If you trade your old business vehicle in for the new one, any gain or loss on the old business vehicle is adjusted into the depreciable basis of the new vehicle and not reportable as a current gain or loss.
Therefore, if you have a loss, it is better to sell the vehicle, and if you have a gain, it may be better to trade it in. The trade-in decision must also consider whether the tax benefits exceed the additional money received from selling the old business vehicle.
Vehicle used partially for business – If the vehicle is used partially for business and partially for personal, the loss or gain must be prorated for the business use that will reduce the potential gain or loss.
Sell – If you sell it, you will incur either a taxable gain or loss, depending upon the amount you sell the business vehicle for less the undepreciated basis in the vehicle. As an example, suppose you sell your business vehicle for $1,000. Your original purchase price was $12,000, and you have taken $10,000 in depreciation leaving you with an undepreciated basis of $2,000. Subtract the $2,000 undepreciated basis from the sales price and you will end up with a $1,000 loss. On the other hand, had you sold the business vehicle for $3,000, the sale would have resulted in a $1,000 taxable gain.
Trade-in – If you trade your old business vehicle in for the new one, any gain or loss on the old business vehicle is adjusted into the depreciable basis of the new vehicle and not reportable as a current gain or loss.
Therefore, if you have a loss, it is better to sell the vehicle, and if you have a gain, it may be better to trade it in. The trade-in decision must also consider whether the tax benefits exceed the additional money received from selling the old business vehicle.
Vehicle used partially for business – If the vehicle is used partially for business and partially for personal, the loss or gain must be prorated for the business use that will reduce the potential gain or loss.