Tax on Sale of a Business Vehicle With Standard Mileage

When you sell a vehicle used for business, the tax consequences depend on how you deducted its expenses. If you used the standard mileage rate, you have already claimed a deduction for depreciation, even if you did not track it separately. This depreciation reduces your vehicle’s cost basis, which is the figure used to calculate the taxable gain or loss upon its sale.

Determining the Vehicle’s Adjusted Basis

The starting point for any calculation is the vehicle’s basis. The initial basis is what you paid for it, including sales tax, title fees, and other costs to get it ready for service. When you deduct business miles using the standard mileage rate, a portion of that rate is considered a depreciation allowance, which reduces your vehicle’s basis.

To find the total depreciation you have claimed, you must multiply the business miles driven each year by the specific depreciation rate set by the IRS for that year. These rates are not the same as the overall standard mileage rate. The portion of the business standard mileage rate treated as depreciation for recent years includes:

• 30 cents per mile for 2024
• 28 cents per mile for 2023
• 26 cents per mile for 2022
• 26 cents per mile for 2021
• 27 cents per mile for 2020

You must perform this calculation for each year the vehicle was used in your business.

Consider a vehicle purchased for $35,000. If you drove 10,000 business miles in 2021 and 12,000 business miles in 2022, your depreciation is calculated separately. For 2021, the depreciation is 10,000 miles multiplied by 26 cents, equaling $2,600. For 2022, the calculation is 12,000 miles multiplied by 26 cents, resulting in $3,120 of depreciation.

The final step is to determine the vehicle’s adjusted basis at the time of sale by subtracting the total accumulated depreciation from its original cost. In the ongoing example, the total depreciation is $5,720 ($2,600 for 2021 plus $3,120 for 2022). The adjusted basis is therefore $29,280, which is the original $35,000 cost minus the $5,720 in total depreciation.

Calculating and Characterizing the Gain or Loss

Once you have the vehicle’s adjusted basis, you can calculate your gain or loss by subtracting this figure from the sale price. If the result is positive, you have a gain; if it is negative, you have a loss. The character of this gain or loss is governed by tax rules tied to the depreciation you claimed.

A gain on the sale is often subject to “depreciation recapture” under Section 1245 of the Internal Revenue Code. This rule requires that any gain, up to the total amount of depreciation you took, be taxed as ordinary income. It is not treated as a capital gain, which often has preferential tax rates. Since your depreciation deductions offset ordinary income, the gain that results from that depreciation is also taxed as ordinary income.

Continuing the previous example, assume you sell the vehicle for $31,000. Your adjusted basis was $29,280, so the sale results in a gain of $1,720. Since this gain is less than the $5,720 of total depreciation you claimed, the entire $1,720 is taxed as ordinary income. A capital gain would only occur if a vehicle is sold for more than its original purchase price. For instance, if the vehicle was sold for $36,000, $5,720 of the gain would be ordinary income, and the remaining $1,000 would be a capital gain.

Conversely, if you sell the vehicle for less than its adjusted basis, you have a loss. If the vehicle was sold for $28,000, with an adjusted basis of $29,280, you would have a loss of $1,280. A loss on the sale of business property is an ordinary loss, which is fully deductible against other sources of ordinary income, such as wages or business profits.

Reporting the Sale on Your Tax Return

After calculating the gain or loss, you must report the transaction to the IRS. The primary form for this is Form 4797, Sales of Business Property. This form is used to detail the sale and determine how the gain or loss affects your tax liability. You will input the figures you have already determined, not recalculate them on the form.

For a sale resulting in a gain subject to depreciation recapture, you will use Part III of Form 4797. You will enter information such as the gross sales price, the date the property was acquired and sold, and its original cost. A key entry is the total depreciation allowed, which is the amount you calculated. The form guides you through the calculation to confirm the portion of your gain that is ordinary income.

If the sale results in a loss, the reporting process begins in Part I of Form 4797. You will report the details of the sale, and the calculated loss will be established on this part of the form.

The outcome from Form 4797, whether a net gain or loss, is transferred to other parts of your tax return. It is combined with your other income and deductions. For most individuals, this means the gain or loss will be carried to Schedule 1 of Form 1040, where it will increase or decrease your adjusted gross income.