Wouldn’t it be nice if you could use all of your personal purchases as tax deductions? Unfortunately, that isn’t allowed. Usually when you sell something you personally own, you either have to pay capital gains tax on the profit or get no tax benefit from the loss.

But when you convert a personal vehicle, or other personal asset, to business use, you create tax benefits. Better yet, you create these new tax benefits without spending any new money. Let's see how.

Example

If you are single and have two or more vehicles, you likely come out ahead by using all vehicles for business. Why? Consider this example:

Jim has three cars with the following basis for depreciation:

 - $50,000 for vehicle 1
 - $33,000 for vehicle 2
 - $27,000 for vehicle 3

If Jim only drives vehicle 1 for business, the most he could deduct for depreciation would be $50,000. But if he drives all three and uses them all 100% for business purposes, he could deduct as much as $110,000!

Depreciating the Former Personal Vehicle

When you convert a personal vehicle to business use, the law sees you as placing the vehicle in service to your business at that time. That means that as of the "placed-in-service" date, you can begin depreciating the asset and claiming your tax deductions. 

To determine the basis for depreciation, use the lesser of fair market value on the date of conversion from personal to business use, or the adjusted basis of the property (generally the amount you paid for the vehicle plus the cost of any improvements).

Example 1: Your spouse paid $43,000 for their personal vehicle. Today, the day you convert it to business use, it has a fair market value of $31,000. Your basis for depreciation is $31,000.

Bonus Depreciation and Section 179 Expensing

You may not use Section 179 expensing on assets that you convert from personal to business use. But you likely can use bonus depreciation. This depends on when you acquired the vehicle that you are converting from personal to business use.

If you acquired the vehicle before September 28, 2017, you may not claim bonus depreciation by converting that vehicle to business use in 2023.

If you acquired the vehicle on or after September 28, 2017, you use today’s 2023 bonus
depreciation rules on the converted vehicle. 

Example 2: Henry converted his 2016 personal SUV to business use in 2023. He may not claim bonus depreciation on the 2016 SUV.

Example 3: Helen converts her personal 2021 SUV, which has a gross vehicle weight rating (GVWR) of over 6,000 pounds, to business use in 2023 when it has a fair market value of $35,000—far less than the $60,000 she paid for it. Helen will use the SUV 70 percent for business.

She can deduct $19,600 in bonus depreciation ($35,000 x 70 percent business use x 80 percent bonus depreciation). In addition, Helen can claim MACRS depreciation on the remaining basis and 70 percent of her vehicle operating expenses. 

Basis When You Sell

There’s a trick to basis when you sell property that you converted from personal to business use—you have a rule for calculating losses and then a different rule for calculating gains.

To calculate losses, use your tax return’s adjusted basis (i.e., the lower of cost or market basis at time of conversion minus depreciation).

To calculate gains, use original cost basis minus post-conversion depreciation. In most cases, original cost gives you a higher basis and thus less tax on your gains. So don’t accidentally use adjusted basis.

If you would like more information on how to properly depreciate your assets, click here to schedule an appointment with one of Gold Standard's seasoned tax accountants.

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