I don't understand how to calculate gain/loss on a vehicle traded in used part-time for business. Does purchase price include the trade-in allowance?

[mmm1958]

Total purchase price of car traded in $16733.  I paid $12733 with my trade-in.  Depreciation of $4978.  The dealer gave me a $10,000 trade-in allowance for it.

[ee-ea]

Line 1 can be any number and line 2 must make 3 be 12733. Gain/loss on old car is factored into new car basis.

1..	“”List price” new car	22733
2..	Trade in allowance	-10000
3..	Cash to pay		12733
4..	Old car price	16733
5..	Depreciation taken	-4978
6..	Basis old car		11755
7..	Basis new car		24488

[mmm1958]

Still confused.  The total price of the new car was $30,897.  Total Payment was $20,897 with the $10k allowance.

Does that mean that the basis of the new car is $32,652? $11,755 plus $20,897?

[Mike9241]

none of the above.  

from IRS PUB 969 deprecition

Property changed from personal use. If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following.
1. The fair market value (FMV) of the property on the date of the change in use.
2. Your original cost or other basis adjusted as follows.
a. Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.
b. Decreased by any deductions you claimed for casualty and theft losses and other items (such as depreciation) that reduced your basis.

you paid cash of $20897 

now we have to look at the trade-in to see what can be added to the basis of new vehicle.

the old vehicle's cost must be split into 2 parts. the personal portion and the business portion.  generally, you would use personal mileage to total mileage to get the personal portion and business mileage to total mileage to get the business portion.

for the personal portion, the amount to add to the basis of the new vehicle is the lower of cost or fair market value on the date of trade-n multiplied y the personal percentage. this may not be in accord with what the dealer put on the invoice. research on the internet 

say personal use is 40% and FMV at the date of trade-in for the whole (old) vehicle is $9000

40% of cost (.4 X 16733) is $6993. 40% of FMV is $3,600. since 40% of FMV is lower than 40% of cost the $3,600 would get added to the basis. (basically, the "depreciation" on the personal portion gets lost)

this is no different than what would happen if there had been 100% personal use and after two years you put it into use in your business.  the IRS would only allow the FMV (if lower than cost ) as the depreciable basis for the business.

then we have the business portion 60% of $16733 is $9740 less depreciation taken is the business portion that gets added to basis.

[ThomasM125]

You need to first determine the basis of the car traded in. If you used that vehicle 100% for the business, that basis would be the cost ($16,733) minus the depreciation ($4,978), which gives you $11,755. You would add this to the cash paid of $20,897, giving you an original basis for the new vehicle of $32,652. However, since your new vehicle is worth $30, 897, you would recognize a loss of $1,755 on the purchase, so the basis would then be $30,897, the cost of the vehicle. Under the old rules when a like kind exchange was possible, the basis would have been $32,652, but that doesn't apply after 2017.

However, you may have used the like kind exchange rules to determine a different basis for the car traded in, if so then you would start with that basis and then subtract the depreciation. Also, you may have used the auto for personal purposes, in which case you would have to subtract the depreciation not taken but allowed for business use from the cost as well as any actual depreciation taken.

Also, if you used the auto for personal purposes, you would have to compare the fair market value of the vehicle to the basis and use the fair market value for the basis if it is a lesser amount.

@mmm1958

[Edited 1/17/22 at 1:38 PST]

[mmm1958]

FMV definitely more than the basis.  I only had the vehicle for a couple of years (purchased May 2019). Vehicle not used 100% business, last year only about 50%.  Turbotax is showing a gain of $1814 on the sale of vehicle.  I don't get it.  @ThomasM125 

[ThomasM125 · Accepted solution]

If you had 50% personal use, that would cut the basis of the vehicle in half, so your cost of $16,733 gets reduced, so your basis that I calculated as $11,755 would be less than that. The smaller your basis, the more chance of you having income on the disposal.

Looking at it from the big picture, you purchased an auto and deducted the cost of it from business income for a couple of years. Now you trade it in on a new car, so if you get more for it than the cost less depreciation (the basis), you have a taxable gain. The gain will be the cost of the new car, less what you paid for it with cash, less the basis of the car you traded in. If you get more for the trade-in than your basis, you have a taxable gain.

I don't know exactly what entries you made in TurboTax, so I can't be more specific.