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 your business, it's not unusual for
its tax basis to be higher than its value.
If you trade the 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). However, if you sell the old vehicle rather than trade 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 with 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.
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opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2014