How do I account for a totaled car that was used for <12% of my business?

Question

My car was totaled on 7/21. On my 2005 tax return I listed it as <12% business use. Purchased another car on 9/8/06. Basically same usage but obviously more expensive car (newer). How is that handled tax forms wise?

Answer 1

You had a disposition of a business asset, which you depreciated (either by actual expenses, or through mileage). This will effect the basis of the replacement car. If you had a gain on the disposition of the first car (which is likely if you had insurance), your basis in the second car will be reduced, and your gain will be deferred since you replaced the car.

None of this will effect your taxes if you take a straight mileage deduction on both cars. But if you are going to take actual expenses on the more expensive car, you need to account for the disposition of the first car.

Answer yes to the question "was this asset disposed of" and follow the software directions. Or seek a preparer who can handle this.

Answer 2

There's nothing to handle. Just claim the business expenses as usual.