When it comes to filing a business tax return, the paperwork can be daunting, especially when it comes to company assets. The Internal Revenue Service has guidelines regulating how companies report the acquisition, depreciation and sales of business property. Business vehicles fall under the category of fixed assets in regard to the tax return. The IRS requires the completion of Form 4797 when a company sells a fixed asset.
Gain or Loss
After selling a company vehicle, the accounting entries should reflect the sale on the cash journal. The company accountant or bookkeeper usually performs this function. He will calculate whether there is a gain on the sale by taking the original cost of the vehicle and subtracting the accumulated depreciation to date. The resulting amount is the adjusted basis. If the sale of the vehicle is more than the adjusted basis, then the entry is recorded as a gain on the sale. If the vehicle sells for less than the adjusted basis, the journal entry will show a loss. These amounts are needed to complete the IRS return.
Completing Form 4797
IRS Form 4797 is where businesses report sales of company property. The form has sections to report both gains and losses. In Section A of the form, the preparer will list the type of property on the line that correlates to whether it was a gain or a loss. If the vehicle was less than a year old, then the net amount of the transaction is recorded in Column B. For vehicles held longer than a year, the net amount is recorded in Column C. For negative amounts, use parentheses.
Adjusting Entries for Vehicle Sales
A sale of a company vehicle results in the removal of the vehicle from the depreciation schedules. The bookkeeper will make a journal entry debiting the gain and accumulated depreciation and crediting the vehicle account. This effectively removes the vehicle from the schedule. This entry will help the accountant during tax time because he will have to report accumulated depreciation on IRS Form 4562.
Alternatives to Selling
An alternative to selling a company vehicle may be to trade it in. You will not have to report an asset gain if you trade a vehicle in. The journal entry to the depreciation schedule will reflect any gains or losses from the vehicle trade. This may be a better option if the sale of a vehicle will produce a profit. Another option is vehicle donation. If the vehicle is fully depreciated, companies may want to consider this option for the charitable donation credit.