Know the tax benefits before making a decision
When it’s time for a business to sell or replace vehicles, or other high-value assets, consideration needs to be given to what the tax ramifications will be. Equipment can be traded in or it can be sold outright, and it can benefit the business owner significantly to pay attention to which method provides the greater tax advantage.
Trade vs. Sale
Choosing whether to trade in your old equipment or vehicle for a new one or selling the old asset outright is best determined by what the resulting gain or loss will be. A loss provides a tax advantage, making a sale beneficial to the business. If the asset’s sale is likely to result in a gain, then it makes much more sense for it to be traded. This is because from a tax perspective, a gain that occurs as part of a trade-in can be treated as an exchange, and therefore the gain can be depreciated over a period of time rather than being taxed as a gain. By contrast, if an asset can be sold at a loss, the above-the line loss offers a significant tax advantage.
Example and Exceptions
To get a clearer understanding of how this decision should be made, imagine a business that has a vehicle that it bought for $32,000 and can sell for $12,000. If during the time that it was owned, $17,000 was taken in depreciation, then the business can report a $3,000 loss with the sale – this represents a tax advantage. If, by contrast, the vehicle had been sold for $16,000, then the same transaction would result in a gain, and this would not be as beneficial from a tax perspective.
There are certain exceptions to this example. One is if the vehicle was not exclusively used for business. If it was also used for personal purposes then the business owner would need to prorate the calculation, as the percentage of use that is attributed to personal use cannot be deducted from the business’ tax. It is also important to remember that when a sale of a vehicle is transacted through the same dealer that it was purchased from, it is not given the same tax treatment as a straightforward sale: it is treated as a trade-in.
Calculating the Benefits
Determining the best way to dispose of a vehicle, or any other business asset, involves a careful assessment of the potential benefits and disadvantages that may be involved. Factors to be considered include the time and effort involved in selling the business for yourself, the difference between the trade-in value and the sale value, and what the tax impact will be. If you are uncertain as to which strategy is best for you, contact our office to set up an appointment to speak with our professionals.
If you have questions about your business assets, please contact us at (513) 713-1152 for a convenient appointment.