Better to Sell or Trade a Business Vehicle?

As the end of the year approaches, business owners may be thinking about replacing a business vehicle— profits from the business may be up, so the timing may be right to acquire a new vehicle, or the current vehicle may finally be on its last legs. A question then comes up: Is it better to sell the current vehicle outright or trade it in for a new vehicle?

When replacing a business vehicle, it does make a difference for tax purposes if you decide to sell or trade it in for the replacement vehicle. If you sell a vehicle, 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. Since trade-ins are treated as an 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 has been 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 trading in the vehicle.

On the other hand, had you sold the business vehicle for $16,000, the sale would result in a $1,000 taxable gain and trading it in would be a better option.

If the vehicle is used for both business and personal purposes, the loss or gain must be prorated for the business use. No loss would be deductible on the personal portion.

Since trade-in values are generally lower than the actual sales value of the vehicle, the trade-in decision must also consider whether the tax benefits exceed the additional money that might be received from selling the old business vehicle.

This concept can also be used when selling or disposing of other business assets.

If you are planning to replace a business vehicle and would like to discuss how its disposition and the purchase of a new vehicle will affect your tax situation, 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.