Selling Company Vehicles or Equipment? Consider The Tax Consequences.

Date February 26, 2021
Categories
Article Authors

Cars, trucks, and construction equipment are an essential part of many businesses, especially construction and service companies. Company owners often elect to expense part or all of the initial cost of their vehicles and equipment through Section 179 or bonus depreciation, which provides some advantageous year-of-purchase tax planning opportunities. But what happens when the vehicle or equipment is no longer needed, when it will be traded in or turned over to an owner for personal use?

Selling

When selling a vehicle or equipment, the business will end up with a gain or loss for tax purposes depending on the remaining un-depreciated value as compared to the sale proceeds. Most think when selling an asset, they will recognize a capital gain or loss. However, this is often not the case when selling business property.

In general, the “character” of the gain depends on the amount of depreciation taken on the business asset. Should the calculated gain be less than the overall accumulated depreciation at the time of sale, the gain would be taxed at ordinary income rates, up to the highest prevailing rate in the year of sale—for 2021, 37 percent. If the gain were to exceed the depreciation taken, it is capital and taxed as a short- or long-term capital gain depending on the holding period (more than a year is considered long-term). If a loss occurs, that loss can be recognized as an ordinary business deduction.

Trade-In

Most businesses trade-in a vehicle or piece of equipment in exchange for a newer, better model. Prior to 2017, owners enjoyed the deferral of gain on a trade-in under “like-kind” exchange rules. The owner’s basis in the new vehicle was reduced by the gain on the old vehicle, thus delaying the taxability of that vehicle until it was ultimately sold. But the Tax Cuts and Jobs Act (TCJA) of 2017 removed the like-kind exchange rules for personal property. Businesses now recognize a gain or loss on the old vehicle by comparing the trade-in value afforded by a dealership to the un-depreciated value of that vehicle. Once the gain or loss is determined, the rules for a sale apply to determine its character.

Distribution to Owner

There are tax considerations for an owner taking possession of a company vehicle or piece of equipment or giving it to a family member. The tax treatment of that distribution will first depend on the company’s tax structure; an S or C corporation is treated differently than sole proprietorships and partnerships:

  • For corporations, the distribution of the asset results in a deemed sale for fair market value and therefore, possibly, a taxable gain. The fair market value must be calculated in some reasonable manner to help determine any gain or loss. Then the rules of selling the asset come into play with one significant exception: If the deemed sale results in a loss, the loss is disallowed for tax purposes if the recipient owns more than 50 percent of the business, directly or indirectly. While the owner is required to pay tax on any gain, he or she is unable to deduct the loss. If there is a gain on the distribution, then the taxation is the same as a sale, the only difference being the use of estimated fair market value as the sale proceeds.
  • For sole proprietorships, the distribution may or may not require recapturing some depreciation when a business-use asset is converted to a personal asset. If recapture is required, the distribution is taxed at the highest prevailing rate in the year of distribution.
  • For partnerships, the distribution may require recapturing some depreciation, but there would be additional questions to answer: Was the property contributed? If so, by which partner? How long was the property held by the partnership? Is the distribution to the same partner that contributed the property? Was the asset purchased by the partnership? Is the distribution of the contributed property to another partner? With partnership taxation, unlike corporations, the questions increase in number and the transaction increases in complexity.

Planning

It is always smart to contact your trusted advisor when selling, trading in, or distributing company-owned vehicles or equipment to an owner. Ask what is best for the business, when the transaction should occur, whether a sale or trade-in should even be contemplated, and how the distribution of the asset will affect the owner. If you wait until after the transaction, you may have no options for reducing or deferring taxes.

Contact your HBK Tax Advisor if you would like more information at 772-287-4480.

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Your Employees May be Stealing from Your Dealership

Date November 13, 2019
Categories
Article Authors
Clint Whitehair

Internal theft is a persistent problem for dealers. It is estimated that dealership employees are stealing the equivalent of $9 per employee per day, so a dealership with 100 employees is suffering a theft loss of $234,000 each year.

With the impact to dealers so high, what can you do to prevent and protect yourself from fraud? Listed below are a few internal controls that if implemented could help prevent theft.

New Department
• Perform frequent unannounced physical inventory counts
• Establish strict inspection procedures
• Allow no options or equipment to be removed without an internal repair order

Used Department
• Maintain an approved list of wholesalers and do business only with those approved
• Verify dealer licenses and sales tax permits
• Review all wholesale transactions that result in a loss and retail transactions with low grosses

Parts Department
• All parts and repair orders need to be computer generated with changes crossed off and initialed by the manager. Then the ticket should be properly voided with the corrected ticket referencing the original document.
• Establish a clear policy for discounted purchases by customers and employees
• Frequently check shipments of parts in company vehicles

Service Department
• Service work should be spot checked to ensure parts charged are being used in the repair order
• During month end procedures, all WIP should be computed and inventoried and all repair orders should be listed
• Ensure no unit leaves the shop without proper payment arrangements being made

Other Items
• Department managers must sign off on payrolls approving the individual and amount
• Bank statements should be delivered to the dealer unopened and should be reviewed for unusual items and cancelled checks. It should also be reconciled by an individual with no access to cash.
• Further, special procedures should be developed to control electronic banking transactions.
• Make sure all clearing accounts are current (payroll tax withholdings, vehicle payoffs)

Fraud can have devastating effects on profits. If are not protecting yourself against fraud, you need to get there. You do not want to be the dealer who has fraud resulting in a $200,000 hit to the bottom line.

Clint Whitehair can be reached by email at CWhitehair@hbkcpa.com or by phone at 317-886-1624.To discuss ways to implement a system of Internal Controls to avoid internal fraud at your dealership or for any other inquiries, contact a member of the HBK DIG at 330-758-8613.

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