Sale of car used in business (1099 employee) - how would it impact my taxes?

[Badjiannr]

Hi,

I am a 1099 employee and I bought a car in 2021. 

I deduct the depreciation of the vehicle as an expense. 

If I sell this car in 2023 and buy a new one, how would it impact my taxes?

Would I have a sort of a penalty on the depreciation taken?

Thanks

[VincentL]

Generally, since 1099 workers (freelancers and independent contractors) don't receive wages, they must pay their own payroll taxes. Those who are self-employed or sole proprietorships must pay the entire payroll tax on their own.

“Depreciation recapture” refers to the Internal Revenue Service’s (IRS) policy that an individual cannot claim a depreciation deduction for an asset (thereby reducing their income tax) and then sell it for a profit without “repaying the IRS” through income tax on that profit. By reporting the profit as ordinary income rather than as capital gains, which is taxed at a lower rate, the difference between the sale price and adjusted cost basis is “recaptured.”

In other words, any gain up to the amount of the depreciation which has been expensed will be taxed at ordinary income rates and not at the capital gains rate.

For example:

Car purchased for $20000

Depreciation of $5000

Adjusted basis is $15000

Sold for $17000

The $2000 above the adjusted basis is taxed at ordinary income tax rates and not at the capital gains rate.

There would not be a penalty. You would only pay the higher rate though.

[DanielleCPA]

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[Tax Hero Niki]

Hi Badjiannr!

Excellent way to think ahead!

If you sell a car just two years after it is placed in service, then yes, there may be a "sort of penalty on the depreciation taken". This would be known as depreciation recapture, and it comes into play typically if you elected to accelerate your depreciation through Section 179 or Special Bonus depreciation elections. There are a few factors involved in the calculation, and you can use TurboTax to run the scenario to get a feel for the impact.

[jafrazz]

I am a courier. I traded in the truck I was using. Do I show the truck as sold or adjust the cost of new truck by the trade in value I received. The original truck cost   28686, the trade in allowance was $14078 and the new truck was $ 55998. I have always used standard mileage deduction, but the return is recapturing the depreciation, . any help how to do this correctly. Thanks

[DaveF1006]

Yes, this is how to report the sale of the truck that was sold.

1. Open or continue your return.
2. Navigate to the Schedule C section:
   • TurboTax Online/Mobile: Go to Schedule C.
   • TurboTax Desktop: Search for schedule c and select the Jump to link.
3. Answer Yes to Did you have any self-employment income or expenses?
4.  Complete the business profile section.  Even though you do not think of this as a business, it is for IRS purposes since you received a 1099 instead of a W2.
5. After completing reporting your income, you will begin entering your expenses. Here you will choose a category called business vehicle expense.
6. Next it will ask you information about your vehicle  List the vehicle you traded in first. Here when you list the type of vehicle, there will be a check mark at the bottom of the page telling us that the vehicle is sold or disposed of.
7. As you go through the questions, it will ask total miles driven in 2024 etc.
8. As you glide through the screens, it will ask you what the sales price of the car is, you will enter $14,078, the trade in allowance. Be sure to adjust this cost according to the business use of your vehicle.  For an example, if you used it 50% for business, then that trade in allowance needs to be reduced by 1/2.
9. Next asks for the cost of the vehicle at the time you started using it for your courier services.
10. Next screen talks about trading in listed property. If you purchased this car on a trade in on another car, and if used that less than 100% for business, you need to enter that information.
11. Now, you need to calculate the depreciation equivalent on mileage you claimed in the past. Click on the learn more button to determine how to calculate this.

Just an FYI, any depreciation that has been claimed in the past is recaptured.  This is true for the sales of all business assets hat have claimed depreciation in the past. In your case, if you claimed mileage, the depreciation is captured from the depreciation equivalent from step 11 above. Depreciation is built into all mileage rates. If you claimed actual expenses and depreciation, that depreciation is recaptured as well.