November 8, 2016
Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it’s time to replace a vehicle used in business, it’s not unusual for its tax basis to be higher than its value. This can be costly tax-wise, depending on how you dispose of the vehicle:
Trade-in. If you trade a vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one — even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits.
Sale. If you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.
For example, if you sell a vehicle you’ve used 100% for business and it has an adjusted basis of $20,000 for $12,000, you’ll get an immediate write-off of $8,000 ($20,000 – $12,000). If you trade in the vehicle rather than selling it, the $20,000 adjusted basis is added to the new vehicle’s depreciable basis and, thanks to the annual depreciation limits, it may be years before any tax deductions are realized.
For details on the depreciation limits or more ideas on how to maximize your vehicle-related deductions, contact us.
It’s been said that timing is everything. With the reduction of individual income tax rates under the Tax Cuts and Jobs Act, now may be the right time to convert a traditional IRA to a Roth IRA.
The Section 179 deduction has long provided a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of depreciating them over time. For 2019, the maximum deduction is $1.02 million, subject to a phaseout rule if more than $2.55 million of eligible property is placed in service during the tax year. Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for assets such as machinery and equipment. Under the 100% bonus depreciation tax break, the entire cost of eligible assets placed in service in 2019 can be written off this year. Contact us to learn how your business can maximize the deductions.
Business owners have been engaging in bartering transactions for hundreds of years. But if your company trades goods or services today, be aware there are tax consequences.