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Business cars: Swing the best tax deal on trade-ins

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in Small Business Tax,Small Business Tax Deduction Strategies

Suppose you’re in the market for a new business vehicle.

Normally, the dealer will agree to a trade-in value for your old auto that reduces the cash you have to shell out for the new one.

Strategy: Figure taxes into the equation before you sign the papers. If you handle it well, you won’t owe any current tax on the trade-in, although you’ll still have to make certain adjustments in the new car’s basis.

Depending on your situation, you might even jigger the trade-in value to lock in a better tax result.

If you replace one business car with another on a regular basis, though, you’ll probably never write off the full cost of any of your cars. Plus, your annual deductions generally are limited by the “luxury car” rules. So, most of the time, adjusting your basis up or down doesn’t have much practical tax effect.

Here’s the deal: If you trade in a vehicle used for business driving for another business-use vehicle, the transaction qualifies as a “like-kind exchange” of property. So, you pay no current tax if you complete the deal within tax-law deadlines:

The new vehicle must be identified within 45 days of the trade-in, and you must receive it within 180 days (or your tax-return due date, plus extensions, if that’s earlier).

If you don’t receive a business car in exchange, you’ll realize either a taxable gain or loss.

In a trade-in situation, the basis of the new vehicle for depreciation purposes equals:

The adjusted basis of the old vehicle

+ Any additional amount you pay for the replacement vehicle

 – The excess depreciation you could’ve claimed if the vehicle was used 100 percent for business.

See the box above for an example of to how to figure your basis.

Luxury-car limits: Don’t cross the line

The luxury-car limits apply to business cars costing more than $14,800. Furthermore, you must reduce the annual dollar caps according to your percentage of business use.

Here are the depreciation limits for a car placed in service by Dec. 31:

First year                 $2,960

Second year              4,800

Third year                  2,850  

Each succeeding year 1,775

Tip: You can’t overcome the luxury-car limits by using the Section 179 expensing deduction. So, you’re usually better off saving the current write-off for other assets.

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