Sole proprietors using their vehicles for business and private purposes should be aware of the tax implications of disposing of the car.
Supposing you have had the car for three years and have claimed wear and tear (depreciation) allowances at a rate of 20 percent a year for tax purposes, and you've added the required amount representing the private portion of the costs to your income.
There are a number of things you could do with the car and each has a different tax implication:
* You could sell the car, or trade it in against a new car;
* You could keep it as a pool car for the business;
* You could keep it as a spare car for private use only;
* You could give it to your spouse; or
* You could give it to an employee in consideration for services rendered.
If you sell or trade in the car, you will effectively recover some the amount you have previously deducted from your taxable income for wear and tear.
You will therefore have to include in your taxable income for the year in which you sell or trade in the car, the amount you receive which exceeds the tax value of the car at the date of sale, but limited to the original cost of the car.
The tax value of the car is the original cost less the wear and tear claimed to date.
If you keep the car as a pool car at your business premises, you may continue to deduct wear and tear at a rate of 20 percent a year until the tax value is zero, and you won't need to add to your income an amount representing the value of your private use.
If you give the car to your spouse you will no longer be able to claim wear and tear.
Since giving the car to your spouse is a gratuitous donation, ie he or she is not paying any consideration for the car, you will be deemed to have recovered the market value of the car and, as with the sale or trade in, will have to include in your taxable income the amount of wear and tear previously you claimed, up to the value of the car. (There will not be any donations tax if the car is given to your spouse)
If you give the car to one of your employees, this will not be a donation since you will expect the employee to provide you with services. Thus, no amount will be included in your taxable income, and you may deduct the balance of the tax value of the car, since this will constitute a normal cost of employment. However, the value of the car will be included in your employee's taxable income.
If you have leased the car, the implications will be quite different, and I will deal with these in another column.