Article Highlights:
- Dispositions for Gain
- Dispositions for Loss
- Vehicle Trade-in
When replacing a business vehicle, it does make a difference for tax purposes whether you decide to sell it or trade it for the replacement vehicle. If you sell a vehicle that was used for business, 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. If, on the other hand, the disposition will result in a gain, it would be better to trade it. Since trade-ins are treated as a tax-deferred 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 is 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 trade in the vehicle.
Sales price $12,000
Cost $32,000
Depreciation Taken <$17,000>
Depreciated Basis <$15,000>
Loss <$ 3,000>
On the other hand, had you sold the business vehicle for $16,000, the sale would have resulted in a $1,000 taxable gain, and trading it in would have been a better option.
If the vehicle is used partially for business and personal purposes, the loss or gain must be prorated for the business use. Loss on the personal portion is not deductible.
Since trade-in values are generally less than the sales value of the vehicle, the trade-in decision must also consider whether the tax benefits will exceed the additional money received from selling the old business vehicle. Of course, there is always the hassle of selling a car to be considered as well.
This sell/trade-in concept also applies when selling or disposing of other business assets.
If you have any questions related to the disposition of vehicles or any other business asset and how the sale will impact you business wise, please give this office a call. We’d be glad to help!