This past tax season problems arose when equipment was traded in, foreclosed on, sold or turned back in. The most perplexing problem facing the taxpayer is the tax consequences arising from any of the above. Keep in mind that when trying to understand the results of a taxable event, amounts that you owe (the loan balance) or receive upon a sale are not used to determine whether you ultimately had a gain or loss on the equipment transaction. However, the loan balance is used as the sales price in certain circumstances, as shown below. The amount that you owe will determine how much cash you realize from the sale of an asset, but the accumulated depreciation you have taken will play a major part in determining gain or loss.
For example, if you originally bought your rig for $80,000 and you have taken $70,000 over the years in depreciation, your adjusted basis for purposes of computing gain or loss is $10,000 (the $80,000 less the $70,000 in accumulated depreciation). If you were to sell that equipment for $30,000, you would then have a $20,000 gain to report on your income tax return. The selling price of $30,000 would be reduced by your $10,000 adjusted basis, which leads to the $20,000 gain. If, when you originally bought the truck, you paid $10,000 down and had a $70,000 loan and repaid the loan down to $20,000, which was the amount owed at the time of the sale, you would then walk away with $10,000 cash; $30,000 for the sale less $20,000 owing on the loan would yield the $10,000 cash. Even though you have $10,000 cash, you have a $20,000 gain, which is the $30,000 sales price less the $10,000 adjusted basis. However, again, you would only have $10,000 in cash, which is the $30,000 sales price less the $20,000 loan payoff.
If you were to trade the asset in and they gave you a $30,000 trade-in value on a down payment of a new piece of equipment, you would still have a $20,000 gain. However, on a trade in, you do not report the gain; you reduce the cost of the new equipment that you buy. If the new equipment is costing $90,000, you would then reduce that by the $20,000 gain not reported and depreciate the new tractor starting at $70,000.
What happens if you turn your truck in and you owed $20,000? You would have to pick up the $20,000 loan forgiveness as the sales price, and report the sale on your income tax return. The IRS says that any loan forgiveness is a taxable event for the amount of the loan forgiveness. If you have to pay a portion of the loan off, then the outstanding balance after the payoff would be considered the sales price of your equipment. The only time you would not have to report a gain for loan forgiveness is if you filed for bankruptcy or if you’re insolvent and the amount excluded is not more than the amount of the insolvency.
To summarize, if you do not make payments due on a loan secured by your equipment, the lender may foreclose on or repossess the property. When the property is repossessed or abandoned, that taxpayer generally reports the transaction as if it is a sale. Generally, lenders will issue Form 1099-A, Acquisition or Abandonment of Secured Property, or Form 1099-C, Cancellation of Debt. These forms include information for the borrower to use in calculating gain, loss, or income from cancellation of debt.
This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter century. Contributions to this article were made by Shasta May, Director of Business Development for PBS. If you would like further information, please contact us at 1-800-697-5153. Visit our web site at www.pbstax.com. Please remember, everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.