Effect of Trade-In on Tax Basis

If you trade in some business equipment that was used 100 percent for business, in exchange for new business equipment of the same asset category, the transaction will not be a taxable event because it will be treated as a "like-kind exchange."

However, the basis of the new equipment will be equivalent to the adjusted basis of the old equipment, plus any additional cash you paid for the new equipment. This tax basis represents the maximum amount you can claim as depreciation for the item, for tax purposes.

Tip

The IRS has issued new depreciation regulations that generally apply to tax years beginning on or after January 1, 2014. But, for 2012 and 2013, it also provided taxpayers with the ability to elect certain regulations. The best choice for each taxpayer depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you and your business.

If you trade in a vehicle that was used partly for business and acquire another vehicle that will be used in your business, you must use the following computation to determine the depreciable tax basis of the replacement vehicle.

The basis for figuring depreciation for the replacement vehicle is:

the adjusted basis of the old vehicle, plus
any additional amount paid for the replacement vehicle, minus
the excess, if any, of the total amount of depreciation that would have been allowable during the years before the trade if 100 percent of the use of the vehicle had been business and investment use, over the total amounts actually allowable as depreciation during those years.

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