man and woman considering to dispose their business vehicles
法務19 12月, 2019

What to consider when disposing of business vehicles

How to determine whether it's time to dispose of a business vehicle and the key decisions that you should make if you think that the time has come to get rid of a vehicle.

If your business owns one or more vehicles, it's a matter of course that eventually a time will come when you'll have to make the decision whether you should sell, trade, or maybe scrap, a vehicle. When that time comes, there are several issues that are likely to come into play:

  • Is it time to get rid of your vehicle? First, you must decide whether you should keep or dispose of your vehicle at this time. Maybe your mechanic just told you that a business vehicle needs a new transmission. Perhaps your vehicle was involved in an accident. Or maybe you're just thinking about trading in a relatively reliable vehicle because the fact that it is "getting along" in years and miles makes you nervous. You'll need to decide whether your business would be more advantaged by getting rid of the vehicle or keeping it a little longer.
  • Explore selling, trading, and other options. Once you are sure that it is a good time to get rid of a business vehicle, you have a few options. You'll have to choose between selling it, trading it in on another vehicle, or, in some cases, even scrapping it. Each option has advantages and disadvantages and you have to decide which option is right for you.
  • How can you get the best price for your vehicle when you sell or trade it? If you have determined that the time is right to get rid of a vehicle and believe it still has resale value, you'll naturally want to get the most money that you can for it. Whether you sell the vehicle or trade it in on another vehicle at a dealership, we'll help show you how to get a better price for it. Learn about getting a vehicle's appearance ready to show, how to research a fair asking price using a dealer "bluebook," and more.
  • Determine the tax consequences of disposing of your vehicle. You may be surprised to learn that disposing of your vehicle may have tax consequences. Suppose you have been fortunate enough to find someone who will buy your old vehicle at a great price. Think it may now be time to put all those dollars to work on a nice new vehicle, redecorating your office in leather, or giving yourself that sales bonus you deserve? Better think about any taxes that you may be responsible for first. Of course, if you happen to sell a vehicle at a profit, the IRS wants some of that profit. But even if you sell a vehicle for less than what you paid for it, there could be tax consequences from the sale. Remember that deduction for vehicle depreciation that your business has been claiming on its tax returns? In effect, you have been telling the IRS that the vehicle was becoming worth less and less each year, maybe even that the vehicle was worthless. So you need to learn how to make things square and prepare to pay any taxes you owe.
  • Take care of housekeeping matters. Matters that should be handled when you dispose of a vehicle include canceling or transferring vehicle registrations, reviewing insurance coverage, and much more. We provide you with a list and explanation of these matters so that you can be sure you have them covered.

Is it time to dispose of your business vehicle?

Generally, there are six factors that you should consider when you make the decision whether to let your vehicle go:

  • Consider the type of business that you're in. Whether or not you can get by with an older, and even shabby-looking, vehicle largely depends on whether or not that would tarnish your customers' image of the business, and whether or not vehicle reliability is critical in your business. If you are in a time-sensitive business having a reliable vehicle that will start on the first try, every time is imperative. On the other hand, in some businesses, you may use a vehicle only to make occasional deliveries to customers who can wait an extra day or two to get them. In these cases, using an older vehicle will probably save lots of money and we recommended using an older one if you can.
  • Consider the type and amount of driving that you do. If you put relatively few miles on your vehicle and don't travel far from home, you can generally get by with a much less reliable vehicle. As a general rule, if you drive 20 miles or less per day and do not travel much more than a 10-mile radius from your business, you can afford to drive a less reliable vehicle. If you do experience a breakdown under these conditions, the vehicle will probably not have to be towed a significant distance to your favorite mechanic. Of course, this assumes that you are not engaged in a business that would have disastrous consequences if you experienced a breakdown.

Do you do a significant amount of driving or regularly travel far from home? If you do, it becomes more important to drive a newer and more reliable vehicle. An unreliable vehicle could leave you stranded which could cause you to be late for or miss an important appointment or even worse, compromise your safety.

  • Consider any unique features of your vehicle. In some cases, particularly those involving trucks and trailers, an older vehicle may have unique features that cannot be easily replaced if you get another vehicle. Some older pickup trucks have higher weight and towing capacities than what is available on the market today. In many states, older vehicles are excused from strict — and potentially costly — emissions or safety standards. Be sure that you can find a replacement that meets your particular needs before you dispose of a vehicle that already does.

An auto expert owns an army surplus truck that he uses to plow driveways and tow cars during harsh New England winters. One of the reasons that he has never replaced his truck is that the army outfitted it with special equipment enabling it to drive submerged in deep water without stalling. This feature, which has come in handy on many occasions, would be difficult to find in a brand new truck.

  • Get the opinion of a mechanic you trust. There is no substitute for having a vehicle that you are thinking of discarding reviewed by a mechanic you trust. Ask the mechanic to review the vehicle and tell you exactly what he or she believes is likely to need repair in the next 12 months. Next, ask for the estimated cost of each repair, and the amount of time the vehicle would be out of service while the repair is performed. Once you have this 12-month estimate, decide whether you can afford the probable repairs and the time you are likely to go without a vehicle while those repairs are made.
  • Consider general rules of thumb on used vehicles. Some government agencies use a maximum allowable expense method for determining when it is time to dispose of a vehicle. For them, if a vehicle has cost more than $XXX to repair in its lifetime, it is immediately sold at auction and replaced. You don't have the luxury of replacing part of your "fleet" every time a vehicle starts costing you money. But you can benefit from observing some basic rules of thumb, offered by auto experts when you decide whether to keep or dispose of a vehicle.
As you review these "rules," please remember that they are not absolute and should not be used as a substitute for getting the opinion of a mechanic whom you trust:
  • If a vehicle has, or will, require two major repairs within a six-month period, it is probably a good time to consider disposing of it.
  • Miles mean less on a vehicle that has been driven predominantly on the highway. (A vehicle with 75,000 "highway miles" may not, for example, need brakes replaced. A vehicle with 50,000 miles of stop-and-go traffic could need new brakes.)
  • If you drive in a state that gets little or no snow each year, your car is generally worth holding onto for a longer time. This is because body rot — which can render even a car with a sturdy engine useless — is a less significant problem in such states.
  • Generally, the ease of selling and trading a car or light passenger truck diminishes sharply as the vehicle approaches the 100,000-mile mark. If you are above this mark and the car is performing reasonably well, keeping it may be more valuable to you than selling.
  • Consider how much future repairs will cost versus the costs of obtaining another vehicle. Once you have estimated the cost of repairs that you are likely to encounter, we suggest that you use these estimates as a factor in figuring the costs of owning your present vehicle and weigh these against the costs of obtaining another vehicle.

When you make this comparison, don't forget the costs of finance payments that you're making now versus those on the new vehicle. Also remember that, if you finance a vehicle, you will most likely be required to carry comprehensive insurance coverage, with a relatively low deductible. This may bring your cost of insurance significantly above what you are used to paying. Note too that many localities have personal and/or business property taxes. In these areas, a newer, more valuable vehicle may result in a higher property tax assessment.

Compare current and replacement vehicle costs

Here's a chart you can use to do a side-by-side comparison of what a different vehicle would cost to obtain and operate:

Current Vehicle 
(next 12 months)
Replacement Vehicle 
(next 12 months)
Estimated repairs, towing, alternate transportation during repairs, and maintenance Estimated repairs, towing, alternate transportation during repairs, and maintenance
Finance payments Finance payments
Insurance costs Insurance costs
Taxes Taxes
Fuel costs Fuel costs
Other expenses (tolls, licenses, safety inspections) Other expenses (tolls, licenses, safety inspections)

Getting the best price for a vehicle

How can you get the best price for a vehicle you want to get rid of? Basically, there are two key considerations to getting a good price for your vehicle when you sell it or trade it in. The two considerations are:

  • preparing the vehicle for show
  • researching the book value of the vehicle

Prepare your vehicle for show

Whether you trade or sell, you will almost always get a better price for your vehicle if it looks like you have taken care of it. If you are truly serious about selling or trading, auto experts have stated that the very best way to prepare your vehicle for show is by taking it to an auto detailing shop. These shops wash, wax, buff, and rejuvenate the interiors of cars and light passenger trucks. Some shops can even steam-clean your engine so that it looks better than the day it rolled off the assembly line!

Because they specialize in this business and have the right equipment, detailing shops can probably do a more thorough job than you could yourself and will save you considerable time. Therefore, you stand an excellent chance of recovering more money than it costs for a full detailing job by getting a higher sale or trade-in price on your vehicle.

You can find auto detailing businesses in the Yellow Pages or online. If you know a local used car dealer, you may wish to ask him or her where to take cars to be detailed.

Research your vehicle's "book value"

Book value is the amount that an auto dealer's guide says that a vehicle of a given make, model, and the year is worth. Book values are usually compiled by polling a number of dealers to find out what prices they have been getting for vehicles they have recently sold. Why is "book value" important? Because many of the parties that affect what you can get for a car consult these manuals.

Bankers look at the values to help them decide how much credit to lend someone on a vehicle. Dealers consult them to gauge what they should charge customers, or ask on the auction block. Some state and local governments even use such values to assess personal property and sales taxes. They do this to avoid having people claim "I must have just caught my neighbor on a good day because he agreed to sell me this one-year-old BMW for $2,000."

The nice thing about researching the book value of a vehicle is that you can do it yourself with a minimal amount of time and effort. In order for your research to be truly valuable, however, you must use a reliable source that is current and you must use it to assess your vehicle correctly. Here's how:

  • Use a reliable source. It helps to use a source that your prospective buyer, or his banker, probably uses. In our opinion, one of the best and most frequently used resources is the National Auto Dealers Association (NADA) manual. The manual is updated regularly, which helps to ensure that the information in it is timely. There are separate versions for cars and trucks.
  • Use a current source. Make sure that the source you check is as current as you can get. In some cases, a vehicle's value may rise or fall dramatically in a relatively short period of time.

A European auto manufacturer was plagued by reports that its cars had a defect causing them to accelerate violently and without warning. While these reports were circulating in the news, and for some time thereafter, used car dealers couldn't give these cars away. Smart dealers drove the cars themselves rather than take massive losses on what was once considered valuable luxury cars. Particularly savvy dealers snatched the cars up at fire-sale prices and held on to them. Eventually, investigators found the claims to be largely without merit. As word of those findings spread, the vehicles once again began rising in value.

If you owned one of those cars and checked its book value in a source that was just six months out of date, you could have been led to believe that your car was worth about $1,500 less than the going rate for it depending on when you sold it.

  • Assess your vehicle accurately. Look up your vehicle according to its make, year, and model. Also be sure that you are comparing vehicles with the same number of cylinders in the engine, and similar option packages (e.g., "LT" package).
  • Get the information you need. Most guides provide separate dollar values for retail, wholesale, and bank loan value. If you are trading in a vehicle, it is generally worth wholesale value minus a deduction for unusually high mileage and/or repairs that are obviously needed. If you are selling a vehicle, the price you can get for it typically lies somewhere between its bank loan value and retail value.

Tax consequences and miscellaneous vehicle disposal matters

The tax consequences of disposing of your business vehicle vary depending on the method of disposal. In addition, registration, insurance as well as recordkeeping matters need to be taken care of when you get rid of a vehicle.

Vehicle disposal tax issues

Once you've successfully sold, traded, scrapped, or donated your vehicle, as with most business transactions, the IRS wants to get a report and a piece of the profits if you made any. The following is a summary of the tax issues that may be involved:

  • If you are selling a vehicle that was used at least partly in business, the general rules on gain or loss on the sale of a vehicle will apply to your situation. You should also familiarize yourself with the IRS's recapture rules.
  • If the vehicle you are planning to sell or trade was used only for personal use, remember that as a rule, any gains on the sale of a personal vehicle are taxable, while losses on such sales are generally not deductible. You may still want to become familiar with the information on the gain or loss on the sale of part-business vehicles if you are unsure of whether you "gained" or "lost" on a vehicle sale for IRS purposes.
  • If you are trading in your vehicle for a different vehicle, the trade-in will have an effect on your gain or loss.

Registration and insurance matters

  • Cancel or transfer your registration from your former vehicle to your new one. If your license plates are non-transferable and you are required to turn them into your state's department of motor vehicles, do so.
  • Cancel or transfer all applicable insurance. Be sure to upgrade your insurance coverage on your new vehicle if it is worth more money, or if you are required to do so by an agreement with your lender.
  • If you are buying a heavy truck or vehicle used to transport passengers for a fee, check if there are any special license restrictions required to drive your new vehicle (for example gross weight/special chauffeur's licenses, etc.)
  • Remove any lettering about your business from the vehicle before it leaves your hands. Otherwise, a new owner could end up giving your business a bad reputation when he cuts off another vehicle in traffic. Worse, someone else could use your former vehicle to engage in criminal activity.

Recordkeeping matters

Put all paperwork related to the vehicle's disposal in a file for future reference or save a copy electronically. It is a good idea to record some basic information about the vehicle and the party to whom you have transferred it. Why? You could be sent a recall notice from the vehicle's manufacturer that you would want to forward to the new owner. Or a future owner could contact you to ask the mileage at the time of sale if he or she suspects that someone has tampered with the vehicle's odometer. Here's a form you can use to record some important information:

Vehicle identification number __________________
Make ___________________
Model ___________________
Year _________
Mileage __________
Price $ __________
Purchasing party's: Name _______________________ 
Address _____________________ 
Phone # (___) ___-____
Pollution devices intact at time of sale? Y__ N__
(Your mechanic or motor vehicle inspection station can help you to answer this question.)

Adjusting your budget to reflect the disposal of a vehicle

What kind of adjustments should you make to your budget when you rid yourself of a vehicle?

  • If you have sold your vehicle yourself rather than trading or scrapping it, consider establishing a financial contingency in your budget to cover the costs of repairs that you could be obligated to make after the sale. Check with your state motor vehicle licensing office about warranty requirements on vehicle sales. A good rule of thumb is to reserve about 25 percent of the estimated cost of these repairs out of sale proceeds.
  • Incorporate tax consequences of the sale into your budget.
  • Revise your budget data to reflect changes in your vehicle expenses.
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