Since you take tax deductions for the vehicles owned by your business, you will also face tax consequences when one of the vehicles is sold. It is possible to owe taxes if you have taken depreciation on a vehicle and then sell it for more than the remaining value on your books.
If you own vehicles for your business, you get to depreciate the value of those cars and trucks and use the depreciation amounts as a tax deduction. The tax rules determine how much you can depreciate a particular vehicle, but after a few years of ownership, it is likely that you have written off most or all of the cost. The use of depreciation acknowledges that business equipment, including vehicles, wear out and lose value over time. The depreciation you claim reduces the amount of income on which you must pay taxes.
If you sell a vehicle for more than the depreciated value on your books, the tax rules count the value above your book value -- not the blue book value -- as a gain. For example, a vehicle cost $25,000 and you have depreciated $20,000 of that cost. You sell the vehicle for $10,000. The result is a taxable gain of $5,000, which is the selling price minus the $5,000 depreciated value of the vehicle. You must pay taxes on that gain.
Report a sold vehicle on Internal Revenue Service Form 4797, "Sales of Business Property." The columns on the form require you to list the selling price, add back in the depreciation and then subtract the original cost of the vehicle. The math works out to the same as the difference between the selling price and the remaining nondepreciated value of the vehicle. Depreciation recapture is taxed at your regular corporate or personal tax rate, depending on how you handle your business taxes.
If you sell the vehicle for a loss, even after adding back depreciation, the loss can be used in the same manner as a loss from any type of business property. For sole proprietors and partnerships, the loss passes through to the individual's -- or each partner's -- income tax filing. A corporation would use the loss on the corporate tax return.
