How is income tax handled on the sale of a car by a self-employed individual?
The sale of a car can be relatively complicated from an income tax perspective for entrepreneurs, with various possible outcomes. When and how is this income taxed? Let us look at the key aspects of this issue.
Sale of a Car Included in Business Assets
If the car is part of the business assets of a self-employed individual, income from its sale is generally considered business income pursuant to Section 7 of the Income Taxes Act. This income is therefore included in the tax base and subject to taxation. In this case, it is also necessary to take into account the residual value of the vehicle.
The residual value is calculated as the acquisition cost of the vehicle reduced by the tax depreciation already claimed. The difference between the sale proceeds and the residual value is included in the tax base.
Sale of a Car After Removal from Business Assets
If the vehicle has been removed from business assets, the situation may be different. The Income Taxes Act stipulates that if the vehicle is sold within five years of its removal from business assets, the income from the sale is still considered business income. After this period expires, the income from the sale is exempt from income tax.
The date of removal of a particular asset from the taxpayer’s business assets means the date on which the taxpayer last recorded the asset in accounting records or last included it in tax records. (Section 4(4) of the Income Taxes Act)
If the car is removed from business assets before the sale (and the five-year exemption conditions are not met), the income from the sale of the vehicle will be taxed pursuant to Section 10 of the Income Taxes Act. The tax residual value may be claimed as an expense against the income.
The tax base is the same as when the income is taxed under Section 7; however, the advantage is that social security and health insurance contributions are not payable on the partial tax base under Section 10.
Sale of a Car Not Included in Business Assets
If the vehicle was never included in business assets, its sale is generally not considered business income. However, exceptions also exist here. For example, if the sale is a systematic activity aimed at generating profit, it may be considered a business activity.
Legal Fiction for Self-Employed Individuals Applying Lump-Sum Expenses
Self-employed individuals applying lump-sum expenses do not have business assets under the Income Taxes Act. In such a case, income from the sale of a vehicle is assessed similarly as if the vehicle had not been part of business assets. Therefore, if a self-employed individual sells a vehicle used for their business activity but did not claim depreciation on it or include it in asset records, the income from the sale is exempt provided that the vehicle has been owned by the self-employed individual for more than one year.
If the vehicle has been owned by the self-employed individual for less than one year, the sale is taxed pursuant to Section 10 of the Income Taxes Act, while the acquisition cost may be claimed as an expense.
VAT Implications
If the self-employed individual is a VAT payer, it is also necessary to consider the VAT implications of the sale. VAT implications would deserve a separate article, so we will only briefly mention the most common and important aspects.
If the vehicle was included in business assets upon acquisition and VAT deduction was claimed, VAT must be accounted for no later than at the time of its sale. The VAT calculation and the conditions under which VAT must be paid may vary depending on the specific circumstances.
If a VAT payer removes a car for personal use, this constitutes a so-called “supply of goods for purposes unrelated to economic activities,” and VAT becomes payable already at the moment of removal (based on the comparable market value of the vehicle at that time). A subsequent sale as a private individual is no longer subject to VAT. If the vehicle is sold directly from the company’s assets, VAT is paid on the sale price.
Conclusion
The sale of a vehicle by a self-employed individual is a matter that requires careful attention to tax regulations. The taxation of income from the sale depends on whether the vehicle was included in business assets, how long it was used, and under what circumstances it is sold. Thorough professional preparation can help avoid complications.
Sources:
Income Taxes Act
- Section 4(1)(c) - Exemption of income from the sale of assets, point 2 motor vehicles
- Section 4(4) - removal from business assets
- Section 7(1)(a) - Business income
- Section 24(2)(b) - Depreciation expenses for assets