Example: Business owner wants to sell or trade-in a former vehicle for $20,000 and purchase a new or used vehicle for $50,000.
The issue we now face under that new tax law is that we have to take income on the business vehicle disposed of – no matter what – whether you convert it to personal use, or you trade it in, or sell it outright (that is, we no longer have a tax-free ‘exchange’ into a new vehicle).
Therefore, you take the gain on the former vehicle when it is sold, or if it is converted to personal use. You might delay that sale or conversion into the next year, but the gain to take is still there. That is the case unless the business can justify an additional vehicle for use by a different employee, or another good business reason to retain the vehicle.
Also, there is a difference when you buy, and what type of vehicle you buy. If you buy an over 6000# gross vehicle weight vehicle, then you get the whole $50K federal write off. That is because the TCJA modified the bonus depreciation rules by allowing 100% bonus depreciation for qualifying property placed in service before January 1, 2023.
And $10K State (in the first year) if you buy prior to October 1. On or after October 1, the State depreciation is about $2,500. Depreciation not allowed in the first year is made up in subsequent years.
Factor in the assumed $20K gain on sale…
[The assumption made is that the vehicle is fully depreciated for tax purposes; if the vehicle is not an SUV type and your business has held it less than 5 years, it may not be fully depreciated, which would lessen the gain and favorably affect the tax result]
…and that results in a net $30K write off for the federal and a net $10K income on your State tax return.
Tax result: about $7200 federal tax savings for married joint taxable income under $315k, about $600-900 State tax increase in year 1 (you make up for that State increase in later years with deductions from the deferred depreciation).
If you buy or start use after September 30, then the State depreciation (in the first year) lessens to $2500, so that’s about another $500-700 in tax for that $7500 difference in State depreciation (again, that is made up in State tax decreases in future years because State depreciation is deferred into those later years).
If you buy a non-SUV type vehicle (under 6000 lbs GVW), then you get 20% of the full purchase price (including sales tax) maxing out a $18,100 fed depreciation in the year of purchase, with a minimum of $10,100 – even if bought and put into use at the end of December – so not quite, but close break-even for the current year on federal tax ($ 10-18k deduction against about $20K gain on sale of old vehicle). You’d start getting the benefit of depreciation on the new vehicle in the following years. The State result for this type of vehicle is about the same as in the prior examples.
If you buy a qualified new electric vehicle with a federal tax credit incentive, the credit is calculated differently if you buy the vehicle personally versus making a business vehicle purchase. Under the new tax law, as a business purchase it is now much more likely that you will be able to take the credit, as well as the vehicle depreciation, although that depends on your alternative minimum tax status. Our recommendation is that a calculation for that should always be made before making that purchase decision.
If you have any questions about an upcoming or future vehicle purchase, feel free to contact my office.