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Selling a Business Car for Cash or Trading It in

Selling a Business Car for Cash or Trading It in 

BrookWeiner, LLC

 

As a business owner, are you aware of the tax consequences of selling your existing business automobile versus trading it in? Are you better off buying or leasing your new car? Below are several important factors for you to consider.

In general, an outright sale of a business automobile generates a gain or loss depending on the net amount you receive from the sale against the basis you have in the car. “Basis” is generally the cost of the car less the depreciation deductions you claimed on the car over the years.

Under the tax-free swap (also known as the trade-in) rules, trading in an old business car for a new car will not result in a current gain or loss, and instead the new car's basis will be equal to the old car's remaining basis plus any cash you paid to trade up.

As a general rule, you should trade in your old business car if:

  • You used it exclusively for business driving, and its basis has been depreciated down to zero, or is very low. In this case, the trade-in often avoids a current tax. For example, if you sell your business car for $9,000, and your basis is only $7,000, you will have a $2,000 taxable gain. However, if you trade it in, a current tax is avoided. Your basis in the new car will be lower than it would be if you had bought it without a trade-in.

However, you should consider selling your old business car for cash rather than trading it in if:

  • You used it exclusively for business driving and depreciation on the old car was limited by the allowable annual depreciation. In this case, your basis in the old car may exceed its value. If you sell the old car, you will recognize a loss for tax purposes. However, if you trade it in, you will not recognize the loss.

Let's take a look at a simple example: Let's assume a business person bought a $30,000 car several years back and used it 100% for business driving. Because of the allowable annual depreciation limit, he still has a $16,000 basis in the car, which has a current value of $14,500. Now, he wants to buy another $30,000 car. If the old car is sold, a $1,500 loss will be recognized ($16,000 basis less $14,500 sale price). If the old car is traded in for a new one, there will be no current loss. Of course, if the old car's value exceeds its basis, the tax-smart move is to trade it in and thereby avoid a gain.

Are you thinking of leasing a business car?

The rules that apply to purchased business automobiles are one reason many businesses are leasing cars instead of buying them. You simply deduct the business use portion of the annual lease costs, and, if the car is a “luxury” model, you'll need to add back to income during each lease year an income add-back amount derived from an IRS table. For auto leases that begin during 2015, the auto is a “luxury” if the auto's fair market value exceeds $17,500 ($18,500 for certain trucks and vans treated as autos for purposes of the “luxury” auto rules).

There are, however, a few special angles you should be aware of:

  • If you pay an additional sum up-front, it should be amortized over the life of the lease.
  • Any refundable deposit required as part of the lease deal cannot be deducted at all.

As all of this may sound a little confusing, before you sell or trade in your business car or lease a new one, please feel free to contact us with any questions at (312) 629-0900.


Disclaimer: The information in this article is general in nature, and is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.


© 2015 Thomson Reuters/Tax & Accounting. All Rights Reserved.