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Tax Tidbit 11/09: Sale of a Business Asset

The decision of whether to trade in an old business car or try to sell it for cash generally should be based on factors such as the amount you can get on a sale versus a trade-in, and the time and bother a sale will involve. However, important tax factors also may affect your decision. Here's an overview of the complex rules that apply to what appears to be a simple transaction, and some pointers on how to achieve the best tax results.

In general, the sale of a business asset yields a gain or loss depending on the net amount you receive from the sale and your basis for it. “Basis” is your cost for tax purposes and, if you bought the asset, usually equals your cost less the depreciation deductions you claim for the asset over the years. Under the tax-free swap rules, trading in an old business asset for a new, like-kind asset doesn't result in a current gain or loss, and the new asset's basis will equal the old asset's remaining basis, plus any cash you paid to trade up. The rules generally are the same for business cars, with a couple of extra twists. Here are some pointers.

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. The trade-in often avoids a current tax. 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 annual depreciation dollar caps. In this situation, 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.

You also may be better off selling your old business car for cash rather than trading it in, if you used the standard mileage allowance to deduct car-related expenses. For 2009, the allowance is 55 cents per business mile driven.

Did you use your car partially for business, partially for personal use? The rules are more complicated in this situation, which can occur if you are self-employed, or an employee required to supply a car for business use.

• If you sell the part-business, part-personal-use car, cost and depreciation must be allocated between the business and personal portions. Gain or loss on the business part is recognized; gain, but not loss, is recognized on the personal part.
• If you trade in the part-business, part-personal-use car, a special basis rule applies for depreciation purposes only: The basis of the new car as computed under the normal trade-in rules is reduced by any difference between (1) the depreciation that would have been allowable had the old car been used 100% for business driving, and (2) the depreciation claimed for its actual business use.

Are you thinking of leasing a business car? The complex rules that apply to purchased business autos are one reason many businesses are leasing vehicles instead of buying them. You simply deduct the business/investment use portion of annual lease costs, and, if the vehicle is a “luxury” model, you add back to income during each lease year an income inclusion amount derived from an IRS table. For auto leases that begin during 2008, the auto is a “luxury” if the auto's fair market value exceeds $18,500 ($19,000 for certain trucks and vans treated as autos for purposes of the “luxury” auto rules).

All of this sounds very complicated, and it is. Before you sell or trade in your business car or lease a new one, please contact Andrew D. Ross, CPA of Bedard, Kurowicki & Co., CPA's, PC (908) 782-7900 x 113, adr@bkc-cpa.com,or visit www.bkc-cpa.com.  We'd be happy to discuss your options.