Year-End Considerations for Existing Vehicles

November 3rd, 2023 at 7:20 AM

Wow, how time flies! Yes, December 31 is just around the corner.

That’s your last day to find tax deductions available from your existing business and personal (yes, personal) vehicles that you can use to cut your 2023 taxes. But don’t wait. Get on this now!

1. Take Back 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 is your spouse using 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: sell the vehicle to a third party before December 31 so you have a tax-deductible loss this year.

Your loss deduction depends on your percentage of business use. 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 in, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember, these rules no longer apply to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.)

Whether you used IRS mileage rates or the actual-expense method for deducting your business vehicles, you could still find a significant deduction here.

Check out how Sam finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 15 years, during which he

• converted his original personal car (car one) 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), which he is driving today.

During the 15 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 will realize a tax loss of $27,000. The loss is the accumulation of 15 years of car activity, during which Sam never cashed out because he always traded cars. (This was 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 deferred the tax results to the next vehicle. IRS mileage rates contain a depreciation component. That’s one possible reason Sam unknowingly accumulated his significant 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 vehicle for this possible loss deduction. Did you procure the business vehicle you are driving today in 2017 or earlier? Did you acquire this vehicle with a trade-in? If so, your tax loss deduction could be big!

3. Put Your Personal Vehicle in Business Service

Lawmakers enacted 80 percent bonus depreciation for 2023, creating an effective strategy that costs you nothing but can produce substantial 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 before December 31.

4. Check Your Current Vehicle for a Big Deduction

Your current business vehicle, regardless of when it was purchased, could have a big deduction waiting for you.

Example. Jim purchased a $60,000 vehicle in 2020 and used it 85 percent for business. During the four years he it (2020, 2021, 2022, and 2023), Jim depreciated the vehicle $10,000. If Jim sells the vehicle today for $25,000, Jim has a $19,750 tax loss.

Mark S. Fineberg, CPA