Many business owners purchase vehicles to perform the required tasks to run their business, and this often means making decisions about how to dispose of the vehicle once it has reached the end of its useful life for the business. A vehicle used for business purposes represents an asset of that business, and selling a business vehicle brings with it multiple tax issues. Before you sell a business vehicle, you need to know how it affects the business in order to make the best possible decision. You might wish to donate or trade the vehicle depending on how the tax implications of selling the vehicle will affect you.
Selling a business vehicle requires you to file paperwork with your federal tax returns. You must report the sale of the vehicle to the Internal Revenue Service. You report the sale of the vehicle by completing and filing IRS Form 4797, the Sales of Business Property form. The form features multiple sections, and each section addresses a different type of asset. Part III is the correct portion of the form if you sold a business vehicle, which is considered a property asset. This portion of Form 4797 allows you to report the sale of depreciable personal property, which is referred to as 1245 property.
Establishing the Tax Basis
You must calculate the tax adjusted tax basis for the vehicle during the sales process. The adjusted tax basis is the value of the vehicle after depreciation. This value is based on the original cost of purchasing the vehicle minus allowable annual depreciation. You can figure depreciation by using the IRS standard depreciation charts. Be aware that you only figure depreciation for years when you actually claimed a depreciation deduction on your federal income tax return. If you have never claimed depreciation for the vehicle, you must use the original tax basis as the value of the vehicle.
Tax Gains and Losses
You must pay tax on a gain from the sale of a business vehicle, and you can claim a deduction for a loss.If you sell the vehicle for more than the adjusted tax basis, you received a gain, and the gain is a taxable amount that must be reported on Form 4797. If the sale price was less than the adjusted tax basis, you can claim a deduction for the difference between that sale price and the adjusted tax basis.
Capital Gains Rate
The IRS sets the tax rate for capital gains on the sale of business property. Through 2013, you must pay a rate of 15 percent for capital gains from the sale of a business vehicle. If your taxable income for a joint return with a spouse equals no more than a certain amount, you are exempt from the capital gains tax. For 2010, the taxable income allowance was $69,000. All joint filers who earned no more than that amount were not required to pay tax on a gain from the sale of a business vehicle.
You can subtract from the sale price of the vehicle any costs associated with the sale. This includes commissions paid to brokers, advertising costs, fuel costs and other expenses associated with completing the sales process. If you trade a vehicle at a dealership or with a private individual, you must consider the fair market value of all property and services received as a part of the sale price. The sale price is not limited to cash that you receive.
- IRS: Basis of Assets
- Denson’s Tax and Financial Services: Sell or Trade Business Vehicle
- National Automobile Dealers Association. "NADA Data 2019: Midyear Report," Page 19. Accessed March 26, 2020.
- Maine Bureau of Consumer Credit Protection. "Downeaster Common Sense Guide: Auto Buying and Financing," Page 3. Accessed March 26, 2020.
- U.S. Department of Transportation, Federal Highway Administration. "Average Annual Miles Per Driver by Age Group." Accessed March 26, 2020.
- U.S. Energy Information Administration. "Weekly Retail Gasoline and Diesel Prices." Accessed March 26, 2020.
Based in Central Florida, Ron White has worked as professional journalist since 2001. He specializes in sports and business. White started his career as a sportswriter and later worked as associate editor for Maintenance Sales News and as the assistant editor for "The Observer," a daily newspaper based in New Smyrna Beach, Fla. White has written more than 2,000 news and sports stories for newspapers and websites. He holds a Bachelor of Arts degree in journalism from Eastern Illinois University.