State Tax on Cash for Clunkers

[S T]

Just received this info on Cash For Clunkers

The California Franchise Tax Board has announced California does not conform to a federal exclusion of the federal subsidy. California taxpayers who receive the subsidy when they purchase cars during 2009 may be surprised to learn they have additional California taxable income. (Spidell’s California Taxletter, August 1, 2009.)

I wonder how many other States are going to tax the subsidy.

Sandy

[Corduroy Frog]

Who gets the money?

Sandy, I understood that it is the dealers who actually receive the money, and the customer makes whatever deal he can make with the dealers.

We all know the customer gets a better deal if the dealer receives cash, but in such a case it is not the customer who receives the money.

How, then, can the customer be taxed? Does he receive some sort of statement claiming he was a pass-through beneficiary of a $4500 payment to the dealer?

[S T]

Cch

CCH released this on 8/4/09 - so there will probably be more to follow

California --Corporate, Personal Income Taxes: FTB Clarifies Tax Treatment of "Cash for Clunkers" Vouchers

The Franchise Tax Board (FTB) has clarified the California personal income and corporation franchise and income tax treatment of the federal Car Allowance Rebate System, or "cash for clunkers," voucher benefit provided to purchasers of qualifying new cars and trucks in conjunction with the transfer of an eligible trade-in vehicle to a car dealer. According to the FTB, the transaction will be treated for California income tax purposes as a sale or exchange of the used car that the person delivers, in exchange for consideration of the $3,500 or $4,500 voucher, as the case may be. Persons trading in used cars may offset the applicable amount realized by the basis of the used cars relinquished, which is generally cost, in determining whether they realized gain on the transaction. Personal losses on the sale of personal assets, such as a family car, may not be used to reduce taxable income.

Sandy

[Bees Knees]

In other words, it is no different than if the dealer gave you $3,500 or $4,500 trade in value on the old vehicle without the voucher program. I assume CA conforms to the federal like-kind-exchange rules. Thus, no tax in CA if the old car was used for business, and no tax if the old car was used for personal purposes and has a basis in excess of $3,500 or $4,500.

[AuditorTurnedGood]

So, if it was a personal use

vehicle, do you still do the depreciation calculations to figure out the basis at the trade in, or is it simply the lower of cost or FMV? If the latter is the case, the FMV as determined at trade in is likely to be far less than 3500 or 4500, making a gain on the sale. Am I tracking correctly on this?

[David1980]

FMV isn't relevant. Say you purchase a car for $10,000 15 years ago. It's personal use so no depreciation is allowed. Your basis after 15 years is still $10,000. If you used the vehicle for business and took the standard mileage rate you would have to figure out the depreciation portion. And if you used the vehicle for business and took depreciation you would adjust basis by that.

If we were talking about how much of a casualty loss would be allowed, then the FMV becomes important.