Trading in property, such as a car, used to be more than about the savings of the sale tax. When it came time to handle the income tax aspects, things were quite easy. The amount paid was used for the depreciation of the new equipment and no time was wasted dealing with the sale of the traded-in item. It was assumed to be sold for its un-depreciated remaining balance with no gain or loss.
Those hopeful of tax simplification will find more to deal with in 2018, as these transactions are in essence more complicated. So now, when you trade in a piece of equipment for another piece of equipment, both used for business, let’s get on with the busy work.
The new part is that the trade-in value given for the old equipment is now part of the sales price, therefore depreciation may need to be recaptured (income realized), should that amount be more than the remaining depreciated value. Recording all this in the accounting system will take some thought and work as most systems simply post the amount paid.
The full purchase price needs to be determined by “grossing up” or “adding back” the trade in value, that total amount, not what was paid will be used for depreciation of the new asset. The good news is that higher amount qualifies for bonus and Section 179 depreciation, both designed to stimulate the economy by providing Tax benefit upfront to businesses spending on equipment by giving the Tax benefit up-front to the business. All that benefit may or may not provide ultimate net benefit to the business, as Tax planning can be quite intricate. Consult your tax advisor!
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