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, contact the experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
