A subscriber to Small Business Tax Strategies has asked us about a common situation: What happens tax-wise when I trade in one business car for another? Do I have to pay the IRS any tax on the value negotiated with the dealer?
Answer: Usually, you won’t owe any current tax on the trade-in of a business car, although you’ll still have to make certain adjustments in the new car’s basis. Depending on the situation, you might even jigger the trade-in value to lock in a better tax result.
As a practical matter, however, you will probably keep writing off depreciation costs each year without ever recovering the full cost of any one of your cars, especially if you’re buying high-priced vehicles (see chart below).
Here’s the whole story: If you trade in a vehicle you use for business driving for another business-use vehicle, the transaction qualifies as a “like-kind exchange” under Section 1031 of the tax code. In other words, you ...(register to read more)