Trading in a business vehicle after 2017

Technical topics regarding tax preparation.
#1
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I'm not seeing much discussion of the "new" rules - as in *no tax-free like-kind exchange* - on the trade-in of a depreciated business vehicle (or any other business-use depreciated personal property, for that matter). Let's just grab an online article and put it up on the wall here and take potshots at it.

Like this:
The New Law & Trade-In Vehicles after 2017
Unfortunately, the new tax law eliminates Section 1030 tax-free exchanges for all personal property, including vehicles. Tax free exchanges are still allowed for real property. The prohibition took effect on January 1, 2018.
This means that you may no longer treat the trade-in of a business vehicle as a non-taxable event. Instead, when you trade-in an old vehicle for a new one, you must pay income tax on your gain, if any.
To the extent your gain is due to the depreciation deductions you took on the vehicle in prior year, you pay tax at ordinary income tax rates, not usually lower capital gains rates. The good news is that you don’t have to pay self-employment tax on such gains.
Example: Assume that Brenda [from another example] trades-in her old pick-up in 2018 for a new one with a $50,000 sticker price. The dealer pays her $26,000 for her old pick-up and she pays $24,000 cash. Her new pick-up has a tax basis of $50,000 which she can depreciate.
The sale of her old pick-up results in a $26,000 gain ($26,000 – $0 basis = $26,000 gain). She reports this gain on IRS Form 4797 and pays income tax on it at her ordinarily [sic] 2018 income tax rates, not capital gains rates. However, she need not pay self-employment tax on the gain.

Should that "1030" in the first line be "1031"?
Does the **sticker price** of $50,000 in the example **really** drive the FMV of the new vehicle **and** the taxation of the gain recognized on the [now] taxable exchange of the old one? Will we tax professionals sit still for that?? That result is just a little bit outrageous, isn't it? "Sticker Price" = M.S.R.P. = "Most Suckers Ready [to] Pay" = Flexible at least, Manipulable at best.

[Many thanks to Stephen Fishman and MileIQ for letting us borrow part of their article.]
 

#2
Nilodop  
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Given that the "gain" on the trade-in is not sibject to SE tax (that's still true, isn't it?), wouldn't the use of MSRP actually be favorable to the taxpayer? He'd pay income but not SE tax on it, but deduct the entire basis of the new truck for both SE and income tax. Yes?
 

#3
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"...wouldn't the use of MSRP actually be favorable to the taxpayer?"

Yeah, sure, let's say it's "favorable," but is "it" even a valid number? What's "it" based on? If the MSRP were $200,000 and there was offered a "dealer discount" of $100,000, and then a financing kick-back of $50,000, what's the "sticker price"? Is "it" $50,000?

If a bigger sticker price is "good" for the taxpayer, I want it bigger. The dealer can then offer a bigger discount - and/or offer a higher trade-in value for my old clunker - to get my business... :o :shock: :o

It's so much smoke, mirrors, marketing and car-salesmanship hokey-pokey. i.e., it's **manipulable**. And that's not good. :x ;)
Last edited by Spell Czech on 15-Aug-2018 4:07pm, edited 1 time in total.
 

#4
Nilodop  
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The sticker price is established by the manufacturer under strict regs. Yes, it's only suggested and, of course, it's not realistic, but unless and until IRS requires otherwise, if taxpayer has a document naming that price, I'm good with it. I only buy used cars, so I'm not sure, but I vaguely recall that the invoice for a new car starts with MSRP, shows a discount to the "real" price, and then deducts the trade-in, thus making this part of the discussion moot.
 

#5
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I'm gonna bet that the "sticker price" isn't subject to any rules. Is it actually defined somewhere?

"...but unless and until IRS requires otherwise..." -
Oh, I see, we don't even have "The Rules" yet since IRS doesn't have enough budget to hire enough people to write and edit the Pubs that will let us know what the rules will **generally** provide, right?
 

#6
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The price of the replacement vehicle is not relevant. The gain or loss on disposition of the old vehicle gets computed based on the trade in allowance, which is generally negotiated between the car dealer and the consumer. Why all this discussion of "sticker price"?

(edit) needless? to say but I will also mention that the depreciable basis of the new vehicle is the actual selling price
Because on T.A. ten was the most you were allowed
 

#7
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Like I've been saying, this is all a circular, mostly unexplored and easily misinterpretable miasma of overlapping BS and undefined terms.
 

#8
Nilodop  
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I'm gonna bet that the "sticker price" isn't subject to any rules. Is it actually defined somewhere?
. Yes and no. The law requiring MSRP sticker is in 15 U.S. Code, sections 1231, 1232, and 1233. MSRP is set by the manufacturer and may or may not. be followed by the retailer. But there are federal regs. Here is one of them. https://www.ecfr.gov/cgi-bin/text-idx?S ... 3&rgn=div8, and here is an excerpt.
(i) It bears repeating that the manufacturer, distributor or retailer must in every case act honestly and in good faith in advertising a list price, and not with the intention of establishing a basis, or creating an instrumentality, for a deceptive comparison in any local or other trade area. For instance, a manufacturer may not affix price tickets containing inflated prices as an accommodation to particular retailers who intend to use such prices as the basis for advertising fictitious price reductions. [Guide III]
. And another.
(g) On the other hand, a manufacturer or other distributor who does business on a large regional or national scale cannot be required to police or investigate in detail the prevailing prices of his articles throughout so large a trade area. If he advertises or disseminates a list or preticketed price in good faith (i.e., as an honest estimate of the actual retail price) which does not appreciably exceed the highest price at which substantial sales are made in his trade area, he will not be chargeable with having engaged in a deceptive practice.


The price of the replacement vehicle is not relevant. The gain or loss on disposition of the old vehicle gets computed based on the trade in allowance, which is generally negotiated between the car dealer and the consumer. Why all this discussion of "sticker price"?. Really? If your client hands you an invoice that shows sale price $50,000 (which happens to be the MSRP) and trade-in $25,000, cash paid $25,000, and a signed "offer" from the dealer dated one day before the sale that offers the new car at $40,000 and allows a trade value of $15,000, cash paid $25,000, what numbers do you use on the return?
Last edited by Nilodop on 15-Aug-2018 7:50pm, edited 1 time in total.
 

#9
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Depending on just how crooked the dealer is, it is apt to come out in the wash, isn't it? Unless the dealer is keeping two sets of books he is booking the sale at the inflated sale price too.
Because on T.A. ten was the most you were allowed
 

#10
Nilodop  
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Doesn't matter to the dealer. It's the customer who cares.
 

#11
Doug M  
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Can't the IRS argue "will buyer, willing seller, neither party......" if we try to change the "sales price" of the vehicle given up.
 

#12
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Nilodop wrote:Doesn't matter to the dealer. It's the customer who cares.


... doesn't the dealer pay income tax? Why does he "not care" about booking $10,000 more in income?
Because on T.A. ten was the most you were allowed
 

#13
Nilodop  
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Seriously? He gets it back when he sells the traded car. But yes, there is a good chance he books the "real" deal. So what? We are concerned with the customer/buyer/trade-in-er.
 

#14
makbo  
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Spell Czech wrote:Like I've been saying, this is all a circular, mostly unexplored and easily misinterpretable miasma of overlapping BS and undefined terms.

It's actually nothing of the sort. You are trying to make a mountain of a molehill, since the new law did nothing to change the definitions and methods of how realized gain is calculated, only whether or not the recognition of such gain can be deferred. Maybe you are not seeing much discussion because there is really nothing new to discuss.

Doug M has the most relevant comment, I think. The only "issue" identified here is how to accurately determine the FMV of the replacement property. Per Pub 946, FMV is "the price that property brings when it is offered for sale by one who is willing but not obligated to sell, and is bought by one who is willing or desires to buy but is not compelled to do so."

"Does the **sticker price** of $50,000 in the example **really** drive the FMV of the new vehicle" Yes, in the example you were told to assume that the sticker price was the FMV. But in the real world, you would use the definition above.

And for those who have commented that FMV of the replacement property doesn't matter, it does. Check Form 8824, Part III, Line 16. "In an exchange, realized gain or loss is the difference between the FMV of the property received in the exchange and the adjusted basis of property transferred." [CE material]
 

#15
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A CPA isn't an appraiser, and shouldn't be giving opinions on fair market value, not where I come from...
 


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