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Updated for 2011
Small Business Deductions: Sell or Trade in Your Car?
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Computing Basis of New Vehicle When Trading In Old Vehicle
When you trade in a vehicle for a new one, how you compute the basis of the new vehicle hinges on your business use percentage of the old vehicle.
100% business use:
If you used your old car 100% for business and trade it in for a new one, your basis in the new vehicle is equal to:
The remaining basis in the old vehicle, if any, plus any other amount you paid for the new vehicle (see the above example).
Less than 100% business use:
If you used your old vehicle less than 100% for business, a special trade-in adjustment is required to establish the depreciable basis of the new vehicle.
This adjustment has you pretend you used the old vehicle 100% for business up to the trade-in date even though you really didn't.
This adjustment is only for determining the depreciable basis of the new vehicle, not for figuring gain or loss.
Here's what you do:
Old vehicle: Determine excess depreciation.
- What you could have deducted:
- Figure the amount of depreciation you would have been allowed to deduct for the old vehicle, from the date it was placed in service up to the date of the trade-in, had it been used 100% for business.
- Write this amount down.
- What you did deduct:
- Subtract the depreciation you actually deducted from the total depreciation that you could have deducted.
- Excess depreciation:
- The difference between what you could have deducted and what you actually deducted represents the excess depreciation amount.
- This amount is used in the basis computation for the new vehicle.
New vehicle: Basis computation.
- Start with the basis of the old vehicle (before deducting the excess amount figured above).
- Add any additional amount you paid to acquire the new vehicle to the basis of the old vehicle.
- Now Subtract the excess depreciation (figured under the steps listed for the old vehicle) from the total figured in a and b, above.
- The total of "a" and "b". minus "c" is the depreciable basis in the new vehicle.
Related Links
- The Mileage Allowance Method
- The Actual Expense Method
- Depreciation Conventions
- Type of Vehicle Being Depreciated
- Heavy Trucks, Vans, and SUVs (weight-rated over 6,000 pounds)
- Passenger Cars (weight-rated at 6,000 pounds or less unloaded)
- Light Trucks, Vans, and SUVs (weight-rated 6,000 pounds or less fully loaded)
- Electric Cars-Depreciation Limits
- Improvements Made to Vehicle
- Depreciation Recapture Rule
- Points to Keep in Mind Before Choosing a Depreciation Method
- Alternative Motor Vehicles or Plug-in Electric Vehicle Conversions
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