Tax implication for selling a vehicle used 80% for business

[markorec]

I am considering selling my vehicle but I am concerned with the tax implications of the timing of the sale.

Vehicle was used 80% for business in 2024 and will be 80% for 2025 if I keep it to the end of the year.

Original purchase price was $54,875. I did not take bonus or 179 deduction. Using 5 yr MACRS.

2024 depreciation was 20% per MACRS ($10,975) multiplied by 80% = $8,780

2025 depreciation will be 32% per MACRS ($17,560) multiplied by 80% = $14,048.

If I decide to sell the vehicle in January of 2026 and trade in for a new vehicle, I am concerned about using the right numbers for the calculation. If a dealer offers me $36,000 for my vehicle is the calculation as follows:

$54,875-all depreciation ($22,828) = $32,047 basis

$36,000 sale -$32,047 = $3,953 gain

Or do I multiply either of those numbers by 80%?

I want to know the right formula because I feel if I wait another year and take another approx $8400 in depreciation and then trade in for say $34,000, the spread becomes even greater resulting in a bigger tax bite.

Is that correct or am I calculating incorrectly? Any help is greatly appreciated.

[AmeliesUncle]

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@markorec wrote:

2024 depreciation was 20% per MACRS ($10,975) multiplied by 80% = $8,780

2025 depreciation will be 32% per MACRS ($17,560) multiplied by 80% = $14,048.

If I decide to sell the vehicle in January of 2026 and trade in for a new vehicle, I am concerned about using the right numbers for the calculation. If a dealer offers me $36,000 for my vehicle is the calculation as follows:

$54,875-all depreciation ($22,828) = $32,047 basis

$36,000 sale -$32,047 = $3,953 gain

Or do I multiply either of those numbers by 80%?

 if I wait another year and take another approx $8400 in depreciation and then trade in for say $34,000, the spread becomes even greater resulting in a bigger tax bite.

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The year you take it out of service you only get a half-year of depreciation.  If you take it out of service in 2025, you will only get $7,024 of depreciation.  If you take it out of service in 2026, you'll get $14,048 of depreciation for 2025 and $4,214 in 2026 (based on exactly 80% business use).

$54,875 x 80% = $43,900 business basis

$43,900 - $27,042 depreciation = $16,858 Adjusted Business Basis

$36,000 x 80% = $28,800 Business Sale Price

$28,800 - $16,858 = $11,942 taxable gain

However, when you refer to a bigger "tax bite", are you meaning that is a good way or a bad way?  The additional depreciation is either neutral or is HELPING you.  You are getting a deduction for that depreciation, so paying the recapture when it sells is just breaking it even.  Or if this is a Schedule C business, you are getting a deduction for BOTH income tax AND Self-Employment Tax, and then selling it is only increases income tax (no effect on self-employment tax).

[markorec]

ok so the correct way to calculate it is to multiply both the original purchase price AND the sale price by 80%?

When I say bigger tax bite, I mean bigger clawback of depreciation because I am getting more tax deductible depreciation each year than actual depreciation of the selling price. For instance, in 2026 half a year depreciation is $4214 but another half a year waiting to sell the car may only reduce sale price by $2000.Eventually I am at zero basis but the car may still be worth 25K. So the longer I wait to sell, the more I will owe back in the year of the sale. Does that make sense?

Also, if I don't have exactly 80% business usage each year, Do I do a weighted average of all the years?

And if I put a new car in as a replacement in 2026, do I get half a year on the old car at $4214 and first year (20%) for the replacement? Is the half year the same no matter what date I actually replace it in 2026?

Sorry for all the questions, first time with a business vehicle replacement.

[AmeliesUncle]

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@markorec wrote:

ok so the correct way to calculate it is to multiply both the original purchase price AND the sale price by 80%?

For instance, in 2026 half a year depreciation is $4214 but another half a year waiting to sell the car may only reduce sale price by $2000.Eventually I am at zero basis but the car may still be worth 25K. So the longer I wait to sell, the more I will owe back in the year of the sale. Does that make sense?

Also, if I don't have exactly 80% business usage each year, Do I do a weighted average of all the years?

And if I put a new car in as a replacement in 2026, do I get half a year on the old car at $4214 and first year (20%) for the replacement? Is the half year the same no matter what date I actually replace it in 2026?

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Yes, both by 80%.

No, you are thinking about it wrong.  You get getting an extra deduction of $4214 (for both income tax and SE tax), but are worried it will eventually increase your income by $2214 (for only income tax)?  If the vehicle was 100% business use and fully depreciated, you would be getting a $54,875 of deductions (for both income tax and SE tax), and you are worried about it resulting in $25,000 of income (for only income tax)?

• Or maybe I'll explain it this way:  For simplicity, let's say you are in the 22% Federal tax bracket and SE tax is 14% (and for simple explanation, some of my numbers will be garbled with 100% business use).  The extra $4214 of depreciation will save you about $1517 this year.  When it is sold, yes, the "clawback" you are thinking of (an extra $2214 of income) will result in an extra $487-ish of tax.  But saving $1517 now and only needing to pay $487-ish when it is sold is a GOOD thing.

You would use the average (not a "weighted" average"), based on the combined business miles of all years versus the TOTAL miles of all years (odometer reading when it was bought and the odometer reading when it is sold).

Yes, you would get half a year of the old vehicle and then the new depreciation of the new vehicle.  In this case, yes, it is half regardless of when it is sold.

• When I say "in this case", it is because your first year was subject to half-year (a full first year is actually 40%, but the 20% you used has the half-year built in to it).
• There are some circumstances that the half-year rule is changed to a mid-quarter rule, but because you bought the vehicle subject to the half-year rule (you said 20%, which is half-year), that is what applies to the sale.

[markorec]

Thank you very much. Now I think I have a clearer picture. In 2026 based on my initial scenario, the "clawback" would be approx 12K total but  that's only Federal not SE income correct?

You have been a huge help. Now I hope the Turbotax program will calculate everything correctly.

[AmeliesUncle]

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@markorec wrote:

Thank you very much. Now I think I have a clearer picture. In 2026 based on my initial scenario, the "clawback" would be approx 12K total but  that's only Federal not SE income correct?

You have been a huge help. Now I hope the Turbotax program will calculate everything correctly.

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Yes, only income tax, not SE tax.  And only paying income tax on $12k after SAVING tax (both income and SE tax) on $27k seems great.  

Unfortunately, TurboTax is NOT set up for reporting vehicles (and other assets) that have varied in business percentage each year.  While you could enter the manually calculated numbers (like I explained above) in the "Sale of Business Property" section, I don't think that section affects things like the Qualified Business Income deduction and the Home Office limit, like it should.  You may consider a tax professional.