Bussiness auto trade-in rules

[Bees Knees]

Sandy,

Use the Worksheet on page 10-2, which is the election made under Regulation Section 1.168(i)-6T(i).

Notice the worksheet says to include both the Section 179 deduction AND the special depreciation allowance in the first year depreciation amount.

As to the quote on page 10-9 saying you have two choices, that is right out of IRS Pub 463, page 18. TTB does not say method 1 is a sale and disposition of the old car. It says it is treated as if you sold the old car under a tax free disposition, with the adjusted basis of the old car being added to the basis of the new car, which is exactly what that election is all about.

Method 1 is SOOOO much simpler and makes more sense than method 2. It basically says you get to do it the old way, the way we use to do it before they came out with those new goofy rules nobody liked or understood.

[Bees Knees]

No wonder you're confused. The first part of that quote from TB 10-9 is poorly written and seems to suggest that a taxpayer has a choice of treating the LKE as a sale of the old vehicle ... taxable ... and a purchase of a new vehicle. That's not at all what the Regs I cited are all about.

You need to clear the fog off your glasses...

1) The taxpayer can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car....

1. You can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car....

[Roland Slugg]

Correction to my prior post

Dear Bees Knees

You're right ... it does say "non-taxable."

In my opinion, however, that passage at TB 10-9 (which apparently is a direct quote from IRS Pub 463) is misleading because it says that the taxpayer "can elect" to treat the transaction as a T/F disposition. That's the part that isn't true.

The only "election" the taxpayer can make is how to handle depreciation going forward. He can continue to depreciate the old vehicle as if it were still owned, or he can "elect" to add the old vehicle's remaining basis to the new vehicle's basis and depreciate the total as one asset. This is how it was always done before that goofy IRS Notice 2000-4 came along a few years ago.

When the proposed Regs about this came out two or three years ago, I submitted comments to the IRS suggesting that the requirement be dropped that specific wording be added to F-4562 in order to elect out of the new "dual asset" rule. My suggestion was that the election could be deemed made by simply adopting the "single asset" approach when claiming depreciation for the year of the exchange. No reply.

[S T]

Okay

Thanks Bees,

I now somewhat understand the election between the methods. I make it hard on myself and you always come through and give a simple explanation. Method 1 is all Soooooo much simplier like you said and I will have only one entry on my depreciation form, is that correct?

I am an "example" person with numbers, etc, and then I understand so much better.

So if I understand correctly, I use the Worksheet on TB 10-2 and whatever that figure arrived at, add to my new financed amount of the new vehicle (Per Old Jack's post).

So example would be 100% business use, Old adjusted basis is $14,290 ($44,703 less spec allow of $15,248 and accum depr of $14,985), papers show trade allowance on old vehicle of $13,000 with payoff of $19063 which equals negative - 6063 and down payment of $5,000 went to pay off old car loan, and then dealer added difference of $1,063 to balance of new car loan. (Negative trade in). New car loan is $67,930. Sales price not including License fees is $67,440. So the basis in the new vehicle is $ ????

If I work the 8824 form I seem to arrive at 68,730. I think what is confusing me is the negative on the trade in.

Thanks for helping!

Sandy

[Bees Knees]

In my opinion, however, that passage at TB 10-9 (which apparently is a direct quote from IRS Pub 463) is misleading because it says that the taxpayer "can elect" to treat the transaction as a T/F disposition. That's the part that isn't true.

Yes it is true.

As you said, it is a direct quote out of the IRS Pub. The Pub (and TTB) explain it as an election to treat it as a tax-free disposition, with the adjusted basis of the old vehicle added to the basis of the new vehicle. You can't leave out the second half of that statement...that the adjusted basis of the old asset gets added to the basis of the new asset. Without that second half of the statement, you are mis-quoting the Pub and TTB.

[Bees Knees]

So example would be 100% business use, Old adjusted basis is $14,290 ($44,703 less spec allow of $15,248 and accum depr of $14,985), papers show trade allowance on old vehicle of $13,000 with payoff of $19063 which equals negative - 6063 and down payment of $5,000 went to pay off old car loan, and then dealer added difference of $1,063 to balance of new car loan. (Negative trade in). New car loan is $67,930. Sales price not including License fees is $67,440. So the basis in the new vehicle is $ ????

If I work the 8824 form I seem to arrive at 68,730. I think what is confusing me is the negative on the trade in.

Your numbers are confusing. If the new car sales price is $67,440, and there is a negative trade in where 1,063 of the unpaid balance from the old car is added to the loan for the new car, that would equal $68,503 for the new car loan amount, not $67,930.

Before I can help you figure it out, you need to be clear on just how much new money or new financing was paid for the new car. For example, lets just say for the sake of your numbers, the total additional cost of the new car on the trade is the $67,930 for the new car loan, minus $1,063 of that loan that is actually a left over amount from the old car loan. That would mean total new money paid or financed for the new car is $66,867.

Assuming the above, I come up with the following:

Line 1) Original cost = 44,703
Line 2) Total depreciation = 15,248 + 14,985 = 30,233
Line 3) Adjusted basis of old car = 44,703 minus 30,233 = 14,470
Line 4) Boot paid for new car = 67,930 new car loan minus 1,063 that was considered part of the old car loan = 66,867
Line 5) Basis of new car = 14,470 + 66,867 = 81,337

Keep in mind that financing and cash are treated the same for basis purposes. It doesn’t matter whether or not it is financed, the basis is the cost the taxpayer either paid or is liable to pay when it is purchased. So since the basis of the old car is already figured into the old financing, the $5,000 pay off and the $1,063 added to the new loan cannot be figured into the basis of the new car, since it is already included in the old car’s adjusted basis, which is taken into consideration on line 3 of the above worksheet.

[veritas]

"If you took a Sec. 179 in an earlier year and traded up this year, can this be deferred using this method ? Thanks, HJ"

This has not been answered yet.

[S T]

Didn't mean to confuse

Bees, No wonder I am confused if I confused you too!

From the auto purchase contract.

Cash price is 60,694.00

plus the adds of accessories and sales tax 6,378.97
NEGATIVE Amount on Trade In (from below) 1,063.20

for total Cash Price of 67,440.17

add the DMV Fee of $481 +Tire Fee of $8.75, total 489.75

subtotal 67,929.92

under total downpayment

trade in value 13,000.00
less loan balance (19,063.20)

Net trade negative ( 6,063.20)

Cash 5,000.00

Total Downpayment 0.00

Amount Financed 67,929.92

Line 1) Original cost = 44,703
Line 2) Total depreciation = 15,248 + 14,985 = 30,233 s/b 30,413
Line 3) Adjusted basis of old car = 44,703 minus 30,233s/b 30,413 = 14,470 s/b 14,290
Line 4) Boot paid for new car = 67,930 new car loan minus 1,063 that was considered part of the old car loan = 66,867
Line 5) Basis of new car = 14,470 14,290 + 66,867 = 81,337 81,157

That is where I am confused, on the negative trade in. Do we not enter the actual amount given on the trade of $13,000 as an amount for the sales price and the negative loan balance? I have tried to work it on the CFS Tax Tools LKE worksheet and it produces the $68,730 figure.

Thanks for taking the time to help on this one!!

Sandy

[S T]

I think so

Veritas,

I think that is true based on Bee's post prior. If you look at the worksheet on TB 10-2 it does state that you do include the Special Allowance or Sect 179 under item #2 worksheet calculation. Using the election referenced on TB 10-9 under method #1.
"Election to treat the transaction as a "Tax Free" dispostion of the old car and the purchase of the new car."

If I have this correct, this is for the depreciation method and the basis, but still it is a LKE and then you continue to complete the 8824 form. These rules do not apply to an actual Sale on form 4797.

That was my first "hurdle", understanding that the Sect 179 or Spec Allowance was included in the new basis adjustment and did not have to be recaptured due to early dispostion due to trade in (LKE)

Bees, is what I stated correct?

Sandy

[Bees Knees]

From the auto purchase contract.

Cash price is 60,694.00

plus the adds of accessories and sales tax 6,378.97
NEGATIVE Amount on Trade In (from below) 1,063.20

for total Cash Price of 67,440.17

add the DMV Fee of $481 +Tire Fee of $8.75, total 489.75

subtotal 67,929.92

under total downpayment

trade in value 13,000.00
less loan balance (19,063.20)

Net trade negative ( 6,063.20)

Cash 5,000.00

Total Downpayment 0.00

Amount Financed 67,929.92

One thing at a time. Before we can plug numbers into the worksheet, we need to figure out just what the additional cost of the new car is.

Nothing adds up to the 67,440.17 amount. 60,694.00 + 6,378.97 + 1,063.20 = 68,136.17, not 67,440.17

[Bees Knees]

I also don't know how you come up with adjusted basis, as 15,248 + 14,985 = 30,233, yet you say it s/b 30,413.

???

[Bees Knees]

Other questions before we continue...

Is any of the sales tax being deducted on Schedule A? If so, that number needs to be backed out of total cost.

Is any of the fees being deducted on Schedule A as a personal property tax (or on the related business form as a current tax expense)? If so, that number needs to be backed out of total cost.

[veritas]

Sandy,

You are correct. Somehow I missed it.

Thanks!

[S T]

Corrections

Cash Price is $60,694.00
Sales Tax & Fees 5,682.97 (rather than 6,378.97) (Sale Tax 5010.97 +672 fees)
Negative Amt from Trade 1,063.20

Total 67,440.17


Bees, On adjusted basis, looks like a I transposed my numbers.

"I also don't know how you come up with adjusted basis, as 15,248 15,428 + 14,985 = 30,233, yet you say it s/b 30,413."

Appears to be approx 75% business vehicle, so 25% sales tax deducted on Schedule A/75% added to cost. 75% DMV Fee deducted as license fee under the auto expense, 25% to personal.

Sandy

[Bees Knees]

Line 1) Original cost = 44,703
Line 2) Total depreciation = 15,428 + 14,985 = 30,413
Line 3) Adjusted basis of old car = 44,703 minus 30,413 = 14,290
Line 4) Boot paid for new car (see below) = 65,124
Line 5) Basis of new car = 14,290 + 65,124 = 79,414


Boot is figured as follows:
Total Amount financed for new car = 67,930
Minus amount financed that represents a carryover from old car (the negative trade in amount) = 1,063
Equals adjusted amount financed that is ONLY for the additional cost of the new car = 66,867

This makes sense if you simply look at the purchase of the new car without the trade in:
Cash price = 60,694 + sales tax and fees 5,683 + DMV Fee + Tire Fee 490 = 66,867

The negative trade in due to the fact that the loan on the old car was greater than the down payment plus trade in value means that Boot paid for the new car has to be the total price of the new car, since nothing from the old car could be used to buy down the cost of the new car. Negative value has no value.

Now we have to subtract from this boot the amount that represents current deductions (or personal expenses) rather than amounts that add to basis, such as the DMV fee $490 + 25% of the sales tax $1,253. Total boot after subtracting these out = $65,124. If there is any other part of those fees that is a current deduction, not added to basis, then they would get subtracted out also.

Double check: Total cash price for new car as if there was no trade in = $66,867
Minus fees deducted currently rather than added to basis = 490 + 1,253 = 1,743
Equals basis of new car = 66,867 – 1,743 = 65,124
Plus adjusted basis of old car = 14,290
Equals basis of new car = 65,124 + 14,290 = 79,414

Any questions?