Maximize Your Tax Benefits When Trading in a Business Vehicle

If you’re considering trading in your business vehicle for a new one, it’s essential to understand the tax implications. The way your trade-in is treated depends on factors like depreciation, deductions, and business use percentage. Here’s what you need to know:

• Section 179 & Bonus Depreciation: If your current vehicle was expensed using Section 179 or bonus depreciation, trading it in may trigger taxable gains. If you deducted the full purchase price upfront, the trade-in value might be considered taxable income.
• Trade-In vs. Selling: The IRS no longer allows like-kind exchanges for vehicles. This means if you trade in a depreciated vehicle, any remaining depreciation could be taxable. However, if you sell the vehicle separately, you may have more control over how gains are reported.
• New Vehicle Deductions: The good news? Your new business vehicle may still qualify for Section 179 or bonus depreciation, depending on its use and weight class. Vehicles over 6,000 pounds may be eligible for 100% bonus depreciation in the year of purchase.
• Mileage vs. Actual Expenses: If you previously used the mileage deduction method, the tax treatment of your trade-in might differ. Switching to actual expenses for the new vehicle could allow you to deduct depreciation, fuel, maintenance, and insurance.
• Record Keeping Matters: Maintain proper documentation of purchase price, trade-in value, and business use percentage to maximize your deductions. Keeping a detailed log of mileage and business expenses can also help support your tax deductions in case of an audit.
• Impact on Self-Employed vs. Corporations: If you’re a sole proprietor or single-member LLC, the tax impact of a trade-in is reported differently than if your business is a corporation. Corporate-owned vehicles may require additional considerations for shareholder benefits and business deductions.

Proper planning can help you avoid unexpected tax liabilities. Need guidance on how to handle your business vehicle trade-in? Contact RSK TAX & CONSULTING, LLC today for expert advice.

CTA: Schedule a consultation today to ensure you’re making the best financial moves for your business!

​

​