When it comes to vehicles, there’s much to think about. For example, the rules on vehicle trade-ins have totally changed. TCJA made the trade-in of your vehicle on a replacement vehicle a taxable event.
Example
To illustrate, let me tell you about a trade-in Joyce completed last month. She traded in her three-year-old vehicle on a new SUV with a gross vehicle weight rating (GVWR) of 6,075 pounds.
The dealer granted her a trade-in value of $13,000 and paid off the $16,000 remaining note on the old vehicle.
Under the tax law, after the Tax Cuts and Jobs Act, this is a sale of the old vehicle traded in and a purchase of the new SUV. So, we have two different transactions. In this story, I’m going to deal with only the trade-in.
Joyce used the vehicle that she traded in 70 percent for business, drove it 41,000 total miles, and used IRS mileage rates to calculate her business vehicle deductions. She paid $50,000 for the vehicle in 2018. Here’s how we calculated her tax-deductible loss:
|
Net purchase price (basis) |
$50,000 |
|
Depreciation |
|
|
2018: 18,000 x 25 cents |
4,500 |
|
2019: 16,000 x 26 cents |
4,680 |
|
2020: 7,000 x 27 cents |
1,890 |
|
Total depreciation |
11,070 |
|
Adjusted basis |
38,930 |
|
Trade-in (sale) |
|
|
Trade value |
13,000 |
|
Pay off the loan |
16,000 |
|
Total trade amount |
29,000 |
|
Net loss on sale |
9,930 |
|
Business percent |
70% |
|
Deductible loss |
$ 6,951 |
Calculation. Because we believe it is easier, we use 100 percent for the calculations and then use the 70 percent business percentage to find the final amount—the deductible loss, in this case.
Depreciation. Within the IRS standard mileage rate is a component for depreciation. For example, the 2020 standard mileage rate is 57.5 cents a mile, with 27 cents for depreciation incorporated in that rate.
Trade-in. The dealer allowed $13,000 as the fair market value of the trade. This operates as cash when Joyce makes her purchase of the new SUV. In addition, the dealer paid off the existing note, so the total value of the trade for gain and loss purposes is $29,000 ($13,000 + $16,000).
Deductible loss. The $6,951 loss is an ordinary loss that Joyce reports on IRS Form 4797.
Takeaway
In conclusion, the important part of Joyce’s story is that her trade-in, like all trade-ins of vehicles and other personal property, is a sale. And that means there’s a taxable gain or loss.
If you are thinking of trading in your vehicle or other personal property, make sure to consider the taxable gain or loss. If you would like my help, contact me by scheduling a call, or by email at [email protected].
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 laws and may find themselves in trouble with the IRS.
Tatsiana B. Bender
Bender CPA, PLLC
Fort Worth, TX 76107
[email protected]
Phone: (817) 313-4352
Bender-CPA.com
