It’s time to examine your existing cars, SUVs, trucks, and vans for some profitable year-end business tax deductions.
Your first step is to identify your gain or loss on sale. Once you have the gain or loss, know these basic rules:
• Gains attributable to depreciation produce ordinary income.
• Gains in excess of original basis produce capital gains. (This is unlikely to happen on most business vehicles, but it can happen with classic and antique business vehicles because they can go up in value.)
• Losses on business vehicles produce ordinary deductions.
In general, at this time of year we suspect you are looking for vehicle loss deductions, so that’s where we will look.
1. Take Your Child’s Car and Sell It
We know. This sounds horrible. But stay with us.
What did you do with your old business car? Do you still have it? Is your child driving it? Or perhaps your spouse has it as a personal car.
We ask because that old business vehicle could have a big tax loss embedded in it. If that loss is inside that old business vehicle, your strategy is easy. Take the vehicle and sell it to a third party before December 31 so that you have a tax-deductible loss this year.
Your loss deduction depends on your percentage of business use. That’s one reason to sell this vehicle now: the longer you let your spouse or teenager use it, the smaller your business percentage becomes and the less tax benefit you receive.
2. Self-Employed? Use the Buy-and-Sell Strategy
Now, thanks to the TCJA tax reform, all business vehicles have gain or loss on sale or trade-in.
Here’s how the strategy works:
• The sale to a third party or the “trade-in sale” of your existing business vehicle produces a gain or loss that does not increase or decrease your self-employment taxes.
• The purchase of the replacement vehicle creates depreciation and, if elected, Section 179 expensing deductions. These deductions reduce your self-employment taxes. (Note: This is also true with IRS mileage rates because such rates include depreciation as a component.)
3. Cash In on Past Vehicle Trade-Ins
In the past (before 2018), when you traded vehicles, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember—this rule doesn’t apply any longer to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.)
Regardless of whether you used IRS mileage rates or the actual expense method for deducting your business vehicles, you could find a big deduction here.
Check out how Sam finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 11 years, during which he
• converted his original personal car to business use;
• then traded in the converted car for a new business car (car 2);
• then traded in car 2 for a replacement business car (car 3); and
• then traded in car 3 for another replacement business car (car 4), which he is driving today.
During the 11 years Sam has been in business, he has owned four cars. Further, he deducted each of his cars using IRS standard mileage rates.
To get a mental picture of how this one sale produces a cash cow, consider this: when Sam sells car 4, he is really selling four cars—because the old Section 1031 exchange rules added the old basis of each vehicle to the replacement vehicle’s basis.
Examine your car for this possible loss deduction. Have you been trading business cars? If so, your loss could be big!
4. Put Your Personal Vehicle in Business Service
Lawmakers reinstated the 100 percent bonus depreciation for 2018, and that creates an effective strategy that costs you nothing but can produce solid deductions.
Are you (or your spouse) driving a personal vehicle? If so, you can convert this vehicle to business use before December 31 and qualify it for some hefty depreciation deductions.
For some reason, lawmakers have deemed it necessary to keep adding rules to vehicle deductions. The many rules can create confusion. If you would like my assistance to help you with your vehicle decisions, feel free to contact me by scheduling a call, or by emailing at firstname.lastname@example.org.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.