IRS Offers Guidance On “Cash for Clunkers”

The Internal Revenue Service (IRS) has issued some guidance on the “Consumer Assistance to Recycle and Save” (Cash for Clunkers program).

President Obama signed the bill into law on June 24, 2009 (you can download the bill here as a pdf). It’s basically a vehicle trade-in and purchase program (leases for more than 5 years work, too): you can receive up to $3500-$4500 in credits for trading in less fuel-efficient vehicles. Different rules apply for different vehicles.

To qualify, your old vehicle must have been manufactured less than 25 years before the date you trade it in (that means it’s a ‘no’ for our Fiat Spyder – it turns 33 this year!); have a “new” combined city/highway fuel economy of 18 miles per gallon or less; be in drivable condition and be continuously insured and registered to the same owner for the full year preceding the trade-in. In other words, clunker or not, it must have been in use.

A new vehicle must, before any features, options, taxes, or destination charges are added to the price, have an MSRP of $45,000 or less. New cars must have a combined fuel economy value of at least 22 mpg; category 1 trucks must have a combined fuel economy value of at least 18 mpg; and category 2 trucks must have a combined fuel economy value of at least 15 mpg. There are no minimum mpg requirements for category 3 trucks but other restrictions apply. To get a feel for the mpg of various vehicles, you can check out the fuel economy web site (in case you’re wondering when it comes to passenger cars, the Toyota Prius gets the best mileage overall, according to the site, and the Lamborghini Murcielago gets the worst mileage).

So, what does any of this have to do with tax? Well, on the individual tax side, nothing, since you can’t normally deduct the cost of your personal use vehicle (though don’t forget about the new car sales tax deduction). And the credit is like a discount, really, and doesn’t count as income to the buyer for tax purposes.

But on the corporate side, there was a lot of confusion. The credits for the vehicles are government-funded: if the dealer meets all of the requirements, including crushing or disposing of the old cars, NHTSA will repay the dealer. The dealer must apply the credit amount to the customer. So it’s a wash really on the dealer’s side: it’s as if the credit never happened. Think about it: The dealer sells $25,000 car to the customer less $3,000 credit. NHTSA gives the dealer $3,000. The dealer still walks away with $25,000.

So what does that mean when it comes to taxes on the dealer’s side? Normally, for tax purposes, gross receipts for the dealer include the full selling price of the vehicle. Since the credit is reimbursed to the dealer, it’s considered part of the selling price and is includible in the dealer’s gross receipts in the year that the vehicle is sold. With respect to expenses, if a dealer incurs any business expenses related to the disposal of the old vehicles, those expenses are deductible.

This is really a win-win for dealers. They are offering a “sale” to consumers for which they don’t take a hit. And since it doesn’t affect their bottom line, it doesn’t change their tax situation.

It’s a good idea for dealers to keep good records to back up claims for income and expenses… And do it quickly. It looks like, even with additional funding, this program won’t last long.

Kelly Phillips Erb

Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

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