When it’s time for a new business vehicle, you may be considering trading in your old one. But is that the right move for you? If you own your business vehicle, you may benefit from selling outright, instead of trading it toward your new purchase.
Although a vehicle can lose value fairly quickly, tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Because of this, your tax basis will usually be higher than your car is actually worth, resulting in a loss when that old car is disposed of.
If you trade the vehicle in toward a new one, this is considered an exchange and the gain or loss is tax deferred. The loss from the old vehicle simply tacks onto the basis of the new one. That extra basis generally will not increase current depreciation because of annual depreciation limits. However, if you were to sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s selling price can be claimed as a deductible loss to the extent of your business use of the vehicle.
For example, if you sell a vehicle with an adjusted basis of $20,000 for $12,000, you have an $8,000 loss ($20,000 – $12,000), which could be written off immediately. Alternatively, if you trade in the same vehicle for credit toward your new purchase, the loss is added to the new vehicle’s depreciable basis and, thanks to the annual depreciation limits, it may be years before any tax deductions are realized.
The key is to make sure the sale occurs in a separate transaction from the purchase of the new vehicle. Your new purchase agreement will show if there was a trade-in, so if you have a loss that you want to take advantage of currently, be careful to keep your transactions separate.
Also, keep in mind that a loss on selling a personal vehicle is not deductible, regardless of how the transaction is structured (though a personal gain is taxable).
Your accountant can help you determine the tax basis of your business vehicle, and help you determine the best method for you.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]