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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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I have a client who traded in a company vehicle that he used

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I have a client who traded in a company vehicle that he used for business 70%. The business basis was $25k.....it was fully depreciatied he traded it in for $15k on an new vehicle. I have booked the full value of the original vehicle on his books at $35k......when I take the asset of the books my tax program is telling me a $10k loss..

1. I need to adjust the basis on the new vehicle, which is the 15k tradein plus the note on the new vehicle? No cash traded hands....

2. The old vehicle, what should the gain/loss be, remember we booked the full asset on the books but only depreciated it 70%...I always thought it was the book value which is about about $10k (35k less 25k deprec) less the $15k received as a trade in so a 5k gain.

I know I am missing a step, it has been so long since I had a client trade in a car. I am rusty. Thanks
Submitted: 2 years ago.
Category: Tax
Expert:  R. Klein, EA replied 2 years ago.

Randalltax :

Doing some math, you find that if 25K= 70%, the total cost was was 35.7K, which means 10,700 was NOT depreciated.

Randalltax :

If it was worth $15K in trade, then that represents 15/35.7 = 42% value remained at trade-in time. Further, that's about 10.5K of the trade-in value that is attributed to the business use.

Randalltax :

If you do this as a like-kind trade, the book value of the business use of the car is zero, but the trade in was worth 10.5K, so that will reduce the depreciable basis of the new car.

Randalltax :

There is no realized gain in a like-kind exchange, which this would qualify for.

Customer:

So the new car is $27700, I would adjust the 15k trade in against it. So the new depreciable basis would be $12700 and depreciated at 70%....

Customer:

There was a note that was taken on the new vehicle for $23k as well......

Customer:

The trade in pretty much paid off the old note on the prior vehicle

Randalltax :

Not quite.

Expert:  R. Klein, EA replied 2 years ago.
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Expert:  R. Klein, EA replied 2 years ago.

If you trade in a vehicle that was used partly for business and acquire another vehicle that will be used in your business, you must use the following computation to determine the depreciable tax basis of the replacement vehicle, assuming that the old vehicle was acquired after June 18, 1984. (If the vehicle was acquired before that date, consult your tax advisor for the proper method to use.)

The basis for figuring depreciation for the replacement vehicle is:

  1. the adjusted basis of the old vehicle, plus
  2. any additional amount paid for the replacement vehicle, minus
  3. the excess, if any, of the total amount of depreciation that would have been allowable during the years before the trade if 100 percent of the use of the vehicle had been business and investment use, over the total amounts actually allowable as depreciation during those years.

 

On August 5, 1997, Sally Fox purchased a car for $9,000. On June 1, 2001, she purchased a new car for $21,500. She was allowed a $2,000 trade-in on the old car and financed the remaining $19,500. Assume depreciation claimed on the old car was $7,200, based on 80 percent business use over those years. Assume further that if the car had been used 100 percent for business reasons, the allowable depreciation would have been $9,000. The basis of the new car for depreciation purposes is computed as follows:

Cost of old car$9,000
Less: depreciation claimed7,200
Adjusted basis of old car
$1,800
Plus: additional amount paid19,500
Total
$21,300
Less
Depreciation assuming 100 percent business use$9,000
Less: depreciation actually allowable7,2001,800
Adjusted basis of new car
$19,500

 

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2882
Experience: Over 20 Years experience
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