2020 Last-Minute Year-End Tax Deductions for Existing Vehicles
It’s the last week in November 2020 and it’s time to examine your existing Business and Personal (yes, Personal) Cars, SUVs, Trucks, and Vans for some profitable Year-End Business Tax Deductions. 1
In this article, let’s first look at your prior and existing business vehicles that you or your pass-through business owns. Then, we will take a look at your personal vehicles as a possible source for a last-minute tax-saving deduction.
Let’s start with prior and existing business vehicles.
Your first step is to identify your gain or loss on a sale. Once you have or know what the gain or loss is, know these basic rules:
- Gains attributable to depreciation produce Ordinary Income.
- Gains in excess of original basis produce Capital Gains. (This is unlikely to happen on most business vehicles, but it can happen with classic and antique business vehicles because they can increase in value.)
- Losses on business vehicles produce Ordinary Deductions.
You would typically report gains and losses on IRS Form 4797, which means those gains and losses travel outside of the business income and expense categories and thus have no effect on self-employment taxes.
Now that you have the basic rules, in general, especially at this time of year we suspect that you are looking for vehicle loss deductions, so that’s where we will explore.
1. Take Your Child’s or Spouse’s Car and Sell It
We know—this sounds horrible. But stay with us.
What did you do with your old business car? Do you still have it? Is your child driving it? Or perhaps your spouse has it as a personal car.
We ask because that old business vehicle could have a big tax loss embedded in it. If so, your strategy is easy: take the vehicle and sell it to a third party before December 31, 2020, so you have a Tax-Deductible Loss this year.
Your Loss Deduction depends on your percentage of business use of the vehicle. That’s one reason to sell this vehicle now; the longer you let your spouse or teenager use it, the smaller your business percentage becomes and the less tax benefit you receive.
2. Cash In on Past Vehicle Trade-Ins
In the past (before 2018), when you traded vehicles, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember, this rule doesn’t apply any longer to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.)
Regardless of whether you used IRS mileage rates or the actual expense method for deducting your business vehicles, you could find a big deduction here.
Check out how “Sam” finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 11 years, during which he
- Converted his original personal car to business use;
- Then traded in the converted car for a new business car (car two);
- Then traded in car two for a replacement business car (car three); and
- Then traded in car three for another replacement business car (car four), that he is driving today.
During the 11 years Sam has been in business, he has owned four cars. Further, he deducted each of his cars using IRS standard mileage rates.
If Sam sells his mileage-rate car today, he realizes a tax loss of $27,000. The loss is the accumulation of 11 years of car activity, during which Sam never cashed out because he always traded cars before he knew anything about gain or loss.
Further, Sam thought his use of IRS mileage rates was the end of it—nothing more to think about (wrong thinking here, too).
Because the trades occurred before 2018, they were Section 1031 exchanges and so deferred the tax results to the next vehicle. IRS mileage rates contain a depreciation component. That’s one possible reason Sam unknowingly accumulated his big deduction.
To get a mental picture of how this one sale produces a cash cow, consider this: when Sam sells car four, he is really selling four cars—because the old Section 1031 exchange rules added the old basis of each vehicle to the replacement vehicle’s basis.
Examine your car for this possible Loss Deduction. Have you been trading business cars? If so, your tax loss deduction could be big!
3. Put Your Personal Vehicle in Business Service
Lawmakers reinstated 100 percent bonus depreciation, and that creates an effective strategy that costs you nothing but can produce solid deductions.
Are you (or your spouse) driving a personal SUV, crossover vehicle, or pickup truck with a gross vehicle weight rating greater than 6,000 pounds? Would you like to increase your tax deductions for this year?
If so, place that personal vehicle in business service this year.
If you see opportunities for deductions that you would like to discuss with us, we are here to help you. Please contact us at Morris + D’Angelo to discuss how to maximize your unique circumstances.
Parts of this article are published with permission from Bradford Tax Institute, © 2020 Daniel Morris, Morris + D’Angelo
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