sale of vehicle partially used for business

[jgcpa]

Vehicle was purchased 8 years ago. In year 9 the car was partially (48%) used for business. Years 1-8 had no business use. Standard mileage rate was used in year 9. In October of year 9, the car was sold. A. Even though the car was used less than 1 year for business, do I still calculate the deprecation equivalent with standard mileage? 

B. Is the sale short term or long term for business part of the vehicle? It was owned 9 years but business use less than 1 year. There is a small gain when using purchase price and % of business miles from purchase date.

Thank you for your reply

JGCPA

[TaxGuyBill]

Yes.

Long term.

[BobKamman]

What amount are you using for basis?  Original cost, or value at time of conversion to business use?

[jgcpa]

To reply to Basis question- I calculated a gain with Basis starting point at Purchase cost. This starting point yielded a gain

JGCPA

[BobKamman]

I'm not sure how I would deal with one of those.  I'm lucky that all my business-use vehicle owners retired before they changed the rules on like-kind exchanges.  And then took away employee business expenses. 

But let's say the car cost $25,000 eight years ago, and the value at trade-in was $12,000.  And for one year, it was driven 10,700 business miles, which I think comes out to about a $3,000 depreciation equivalent, and 50% business use.    If you subtract the $3,000 from the $25,000, you still have a basis of $22,000.  If you subtract the $3,000 just from the $12,500 basis for the business-use half, you still get a basis of $9,500, and that's more than the $6,000 proceeds for the business half.  

Of course, the miles could be a lot higher and the business use percentage could be a lot higher.  Let's say 21,400 miles and 80% business use.  That $6,000 depreciation, subtracted from $20,000 basis for the business part.  Still a loss.  You're not subtracting the whole standard mileage rate amount, are you?  It should be just the depreciation part of it.  

[jgcpa]

HI Bob,

This is not a like kind exchange. 

The original cost of the car is $22,000. Business miles in year 9 ( the year of sale) =6335 miles. Total miles life of car 136353 miles. Traded in value $6500.  Depreciation equivalent $1774. Value at conversion date $8000. Miles driven in the year of sale 22016 miles year 9 only.

[BobKamman]

So 29% business use when sold.  29% x $22,000 original cost = $6,380.  Subtract $1,774 from that and the basis is $4,606.  Trade-in allowance was $6,500, 29% of that is $1,885.  So you have a loss of $4,606 minus $1,885, or $2,721.  

I'm not sure I would try to get away with claiming a loss, but I wouldn't go out of my way to find a gain.  I tried to find some IRS guidance on this, not that it would be dispositive but could be informative.  Nothing.  I think they stepped in it when they banned considering it a like-kind exchange.  Maybe blame that on Congress.  

I would probably say that the day he traded it in, he didn't have any business mileage, so the basis of the 100% personal-use car was $22,000 less $1,774.  And since it's a personal asset, no loss allowed.  

Added:  Reading the original post, you say 48% business use in year of sale.  But same method applies.  And I note that it was not a trade-in, it was actually sold.  But trade-ins count as sales these days, anyway.  He didn't drive it for business the day he sold it, right? So it was a 100% personal vehicle.  

[TaxMonkey]

Over the lifetime of the vehicle business use was 4.65% (6335/136353)

Business basis = 22,000 x 4.65% = 1022 less depreciation 1774 = 0 adjusted basis

Proceeds from the sale 6500 * 4.65% = 302 gain, since business basis would be reduced to zero.

[jgcpa]

Thanks everyone for your replies.  I came up with the $302 gain also. 

[BobKamman]

That's not how I would do it, but he's your client.  What if the business use had occurred in the first year, rather than the last?  Still tax him for a gain?  Do we need to ask every client who sells or trades in a car if there was ever any business mileage taken?  What if an employee is being reimbursed for mileage at the standard mileage rate?  Do they have to pay tax on the reimbursed depreciation?  

[HOPE2]

@TaxMonkey Thanks for short and productive answer, there you go

[TaxMonkey]

There still are some open questions regarding this treatment, that I really couldn't find any guidance on.

Starting with is the business miles divided by lifetime mileage the proper measure of business use or should the business use be measured from the first time the vehicle is "converted" to business use.

For example, lets take a similar example car purchased 8 years ago (and driven 8,000 miles each year) and converted to business use in year 9.  In that year the vehicle is driven 20,000 miles 12,000 for business.  Taxpayer wishes to use actual expenses and claim bonus depreciation.  Are they eligible for bonus depreciation because in year 9 business use was more than 50%?

I think most of us would say yes, but is that situation analogous to converting a vehicle to business use and using the standard mileage rate?

[TaxGuyBill]

---

@TaxMonkey wrote:

is the business miles divided by lifetime mileage the proper measure of business use or should the business use be measured from the first time the vehicle is "converted" to business use.

---

I'm too lazy to look for citations, but ...

For calculating a gain, you use the Adjusted Cost Basis.  Logic would dictate you use the time period from the original Cost to when it was sold.

For calculating a loss, you use the Adjusted FMV Basis (assuming the original FMV was lower than the original Cost).  Logic would dictate that you use the time period from the original FMV Basis to the when it was sold.

And of course there are situations where there is neither a gain or a loss due to neither of the above applying.

[TaxMonkey]

Yes, I'm familiar with the concept of gain and loss basis when converted to business use.  But I am still not sure how to allocate the basis between business and personal use.

The real question is for determining the gain basis should the lifetime miles of the vehicle be used or should only the miles driven since the first business use be used as the denominator.

In the present case, if we only choose to use the miles after the first business use we would have 29% (6335/22016) Business use.  If we assume that the FMV of the auto at conversion was $6500, this would give us a loss basis of $696 (29% x 6500) less 1174) and a gain basis of $5156 (29% x 22,000 less 1174) with the proceeds $1,870 resulting in no gain or loss.

[TaxGuyBill]

As I indicated in my last comment, it depends on if you are calculating a gain or loss.

Gain is based on the Cost.  The cost starts the ownership period, so you do the percentage based on the entire ownership period (the date of purchase until the sale).

If there isn't a gain, then you determine if there is a loss.  Loss is usually based on FMV.  FMV starts the business period, so you calculate the percentage based on the date it was converted to business (the date of the FMV until the sale).

[TaxMonkey]

That makes sense, it just that the depreciation component of the standard mileage rate so heavily out weighs the business use basis when the vehicle is used so little for business.

[BobKamman]

The fallacy is claiming the vehicle is being used 5% for business use, based on lifetime miles, when depreciation is based on the period that the vehicle is being used 28% for business use.  Using that method, the taxpayer who drives only 50,000 miles for the first 10 years, all personal, and then another 50,000 miles in the last two years, all of it for business, has no gain.  The amount of basis reduced should be the same percentage of total remaining basis, as the percentage of business use.

In the absence of IRS guidance, I would not use a "protect the revenue" approach against my client's best interest -- especially when there's no evidence that an IRS examiner has ever done that.