Starting a Small Business

Year-End Small Business Tax Planning: Better to Sell or Trade a Business Vehicle?

Year-End Small Business Tax Planning: Better to Sell or Trade a Business Vehicle?

If you own a small business that uses a business vehicle, it’s always a good idea to think ahead about the best way to dispose of it or replace it. There are some situations that are likely to spur your decision – some may be negative, such as the vehicle breaking down and incurring high maintenance costs, and some may be positive, such as the business having a particularly good year and having extra cash. If you are considering taking this type of action, do you know whether it is smarter for you to sell the vehicle or to replace it via a trade? Your decision does have tax ramifications.

The first thing that you need to do know is that any loss you incur on the sale of your vehicle – or for that matter any gain – needs to be reported on your tax return, so a transaction that is anticipated to result in a loss can offer you a tax advantage. By contrast, when you decide to exchange the old vehicle for a new one and use the currently-owned vehicle as a trade-in, that loss or gain is ameliorated into the depreciable basis, making it more advantageous to choose this option when the transaction would represent a gain. 

To get an idea of what the impact of this would be, let’s look at a situation in which a business vehicle originally purchased for $32,000 now has a value of $12,000. In the years between the sale and the current year, the vehicle’s depreciation was $17,000. Overall, getting rid of the vehicle by selling it would represent a loss, making it more advantageous to purse an outright sale. This would allow the business to write off the loss as a deduction – a far better tax option than trading it in.

By contrast, if you consider the exact same purchase and depreciation numbers but are able to sell the vehicle for $16,000, the entire scenario changes because the sale would represent a $1,000 gain. This would be taxable to the business, thus making a trade-in a fiscally smarter option.

Many businesses have vehicles that are used for both personal and business purposes, and when that is the case the taxpayer needs to carefully calculate what portion of its use is attributed to each and to carefully prorate any gain. If there is a loss, only the prorated business portion can be deducted. 

In almost all cases, a vehicle that is traded in will be valued at less than would be the case in a vehicle sale, and so that must be taken into account when running through the calculations.  The same is true of many other assets that a business may own and anticipate replacing.

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Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

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