Better to Sell or Trade a Business Vehicle?
As is the case with any business asset, there are important decisions that need to be made when the time comes to get rid of a vehicle. Cars or trucks that are used in business may be sold or they may be traded in, and the tax ramifications of those two actions can be very different. Before making the decision about how to dispose of a business vehicle, it is important to determine whether the sale would result in a gain or a loss, because if it results in a gain the business is better off engaging in a trade in for a new vehicle then a straightforward sale. A gain realized on a sale would be taxable, where in a trade it would be incorporated into the depreciable basis on the new vehicle. Alternatively, if a sale would result in a loss it can be written off as such, thus providing a tax benefit.
Determining whether the sale of a vehicle would result in a loss or a gain requires three different pieces of information. You need to know how much you can sell it for, what the original cost was, and how much depreciation you can take on the vehicle. The calculation is shown below:
Sale price $12,000
Original Cost $32,000
Depreciation Taken <17,000>
Depreciated Basis $15,000 <15,000>
Loss or Gain <$3,000>
In this example, because the original purchase price was $32,000 and the vehicle’s depreciation was $17,000, the depreciated basis of the vehicle is $15,000, which is $3,000 less than the sale price of the car. This means a $3,000 loss, making it worthwhile to sell the vehicle and write the $3,000 off. By contrast, if the vehicle’s sale price had been $16,000 it would have been $1,000 over the depreciated basis and resulted in a $1,000 gain for the business, which would have been taxable. A trade-in makes much more sense.
There are a number of variables that must be kept in mind when making these types of decision. It is important to remember that if you sell a vehicle to the same dealer from whom you purchase, the transaction is considered a trade in. It is also important to be mindful of the difference in treatment between a vehicle that is used solely for business purposes and one that is used both for personal and business. When this is the case, you need to determine the appropriate amount to prorate the loss or gain, and only take the tax deduction for the prorated business portion of any loss that is realized. It is also important to remember that the sales price on a used vehicle is likely to be greater than the value it is assigned on a trade in, and this can impact the tax benefits you are able to realize.
Determining the most advantageous way of getting rid of a business asset can be quite complex, and your decisions may have ramifications of which you are unaware. If you are considering selling a business vehicle or any other piece of equipment, contact our office to make sure that you are going about things in the most beneficial way.
For help with managing your business assets, call us at (301) 637-6453 for a consultation.