Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. In other words, there is a maximum depreciation write-off per year. For example, let’s say a business vehicle depreciated $5,000 in one year. But the law says you’re only allowed to write-off $2,000. Thus, when it’s time to replace a vehicle used in business, it’s not unusual for its tax basis to be higher than its value.

If you trade your vehicle in for a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one (even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits). However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.

For example, if you sell a vehicle with an adjusted basis of $20,000 (meaning the original cost of the business vehicle is reduced by depreciation) for $12,000, you’ll get an immediate write-off of $8,000 ($20,000 – $12,000). If you trade in the business vehicle rather than selling it, the $20,000 adjusted basis is added to the new vehicle’s depreciable basis and, because of the annual business vehicle depreciation limits, any losses are deferred to be written off at a later time.

If you have any further questions or would like more tips on how to maximize tax deductions, contact our tax specialists.