Work vehicles are responsible for transporting goods, services, and performing other work-related tasks in a timely manner. Without them, businesses could simply not operate efficiently nor get their supplies into consumers’ hands. While this may be true, business vehicles and company cars are big investments, never mind the size or length of time you’re in business. That is why it’s important for business owners to understand the tax implications of selling or trading in a business vehicle before the deal is done.
Read on to learn everything you need to know about selling a vehicle used for business purposes. Plus, you might be surprised to learn that there are a few exceptions in which selling is not applicable.
This is a predicament that most car owners face when the time comes to invest in something new. It doesn’t matter if you’re making the switch for practical reasons or looking to upgrade, it’s always best to consider both options. And a lot of times, the answer will depend on the value of your vehicle or your personal financial health.
The same scenario pertains to small and large-scale business owners who have work vehicles, vans, lorries, or commercial fleets under their ownership. In contrast to a personal sale, selling a business vehicle will have an immediate impact on your business, as well as your tax filing that year. For business owners and sole proprietors, the decision to sell or trade in a vehicle used for business goes generally two ways:
Although the used car market has reached an all-time high in recent times, very rarely do you earn a profit by trading in a work car. This is something to keep in mind, however, every business owner should make the best decision based on their tax outlook.
By the time you’ve made the decision to sell your business vehicle, you’ll quickly see how it’ll influence your tax filing. First, you must assess whether you earned a profit or incurred a loss from the sale. The way to do this is by subtracting the car’s adjusted basis from its sale price. The adjusted basis is merely the car’s original cost minus any depreciation deductions you’ve taken. You must calculate the adjusted basis during the sale process.
Now, depreciation deductions are not something every taxpayer keeps tabs on. If you use the standard mileage rate, for instance, the IRS does not require you to separately deduct this business expense because it is already included in the standard rate. On the other hand, the actual expense method obliges you to calculate each business expense individually, including gas costs, insurance, depreciation and more. Sounds easy enough — you already have your depreciation calculated.
But let’s say you’ve taken the standard mileage deduction for most of the years while you’ve owned your business vehicle. You might be wondering how you can go back and calculate actual depreciation. Don’t worry — the IRS provides you with a chart of devaluation amounts in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. All you need to do is multiply the total business miles driven by the set devaluation amount.
Even though you might be eager to bid farewell to your current work vehicle, there are tax consequences to consider. To begin with, you must pay income tax on your gain. You can determine your gain by analyzing the depreciation deductions on your former vehicle, as previously described.
Truth be told, a business vehicle is usually sold at a loss. This is because its resale value is often less than the depreciation allowed by the IRS. Before you jump to conclusions that a loss is a bad thing, in tax circumstances, it’s actually a benefit. A loss on a business vehicle qualifies as a write-off.
There are two exceptions to deducting losses. You cannot sell your old work van to a close relative and deduct it as a loss. In regard to tax purposes, a close relative is a lineal descendant or ancestor, such as parents, children, siblings, or grandparents. Secondly, you cannot sell your business vehicle from one entity you own to another corporation or LLC in which you are the majority owner.
On the condition that you use your business vehicle 100% of the time for work-related tasks, the above information complies directly to business owners. With that said, selling a business vehicle is subject to taxation. During the sale process you must pay a tax on a gain or you can claim a deduction for a loss. Either scenario will impact your taxable income in some way.