In late June, the President signed into law the “Consumer Assistance to Recycle and Save Act,” also known as “cash for clunkers,” which gives a cash incentive of $3,500 or $4,500 for individuals and businesses to trade in older gas-hogging vehicles for new, more fuel-efficient ones. The new vehicle will have to be purchased between July 1 and November 1 of 2009. The $3,500 or $4,500 vouchers are not treated as gross income for federal tax purposes, or for federal or state assistance programs.

Under the terms of the program, trade-in cars (the clunkers) must be drivable, get no more than 18 miles per gallon, have been built in 1984 or after, and have been owned (registered to) and insured by the purchaser for at least a year prior to the trade-in.  The miles-per-gallon rating refers to the Environmental Protection Agency's combined city-highway rating of a given model (for those of you curious about the “combined” MPG rating of the clunker sitting in your driveway, check here.

A consumer will receive a $3,500 voucher toward the purchase of a new car with a MSRP of $45,000 or less and getting at least 22 mpg.  The voucher will increase to $4,500 if the new car is 10 mpg higher than the trade-in.  Consumers will also be able to use the vouchers toward the five-year lease of a vehicle.  Vouchers will also be available for small and large light-duty trucks.  Consumers won't actually receive the vouchers or the cash value of the vouchers in hand. Instead, for a qualifying new vehicle, an electronic transfer from the government to the dealer will be issued, and the voucher amount will be credited as all or part of the down payment on the vehicle's purchase.

The voucher value replaces the trade-in value, and does not add to the trade-in value. Whether you utilize the voucher program will depend upon the value of your trade-in vehicle.  If its value is greater than the voucher, you probably will not want to take the voucher value for your old vehicle.  On the other hand, if it is worth less, then you certainly will want the higher voucher value.  A side benefit of using the voucher program is that you won't have to negotiate the trade-in value with the dealer.

Also keep in mind that under the voucher program the dealer cannot resell the trade-in and must have it scrapped.  The selling dealer must use the voucher in addition to any other rebate or discount that it advertises or the manufacturer offers, and the voucher can't be used to offset a rebate or discount. Dealer participation in the program is voluntary, and those who do participate must register with the program.

Tax Consequences - The vouchers are not treated as taxable income of the vehicle purchaser.  Think of the voucher value as taking the place of your trade-in value.  However, if the trade-in vehicle has a greater market value than the voucher value, then it may not be to your financial benefit to utilize the voucher program unless the after-tax benefits are greater.  The tax-free feature of the vouchers will result in the following tax consequences:

• Personal-Use Vehicle - Generally, there are no tax consequences related to selling or trading in your used vehicle since rarely is one sold for more than its original cost to the owner.  In addition, losses from the sale of personal-use property are not tax-deductible.  
  
  

• Business Vehicles - Since the voucher is not treated as income, a business that utilizes the voucher program is treated as if it traded in the old vehicle and received zero for it.  Its basis in the new vehicle would be the amount paid net of the voucher and any other rebates. 

For a business, trading in a qualifying vehicle with a low or zero depreciated basis definitely beats selling it for an amount equal to or less than the voucher's value.  In fact, it may even pay to forego a higher sales price and instead trade in the old vehicle to receive a tax-free voucher.  For example, if a business paying tax at an effective tax rate of 30% sells a zero-basis truck for $6,000, it would have $4,200 left after paying a $1,800 tax.  If the business trades in the old truck and qualifies for a tax-free $4,500 voucher under the new program, it would be $300 ahead.

If you have any tax-related questions in regards to this new Federal program, please give this office a call.