How to navigate the 'cash for clunkers' program - Tax News & Information - Investment News

General Motors Corp. has returned and the “cash for clunkers” bill has been enacted by Congress, providing vouchers valued from $3,500 to $4,500 when you trade in a vehicle. Let us explore some of the tax and finance decisions that enter the process.
JUL 29, 2009
By  Bloomberg
Situation: General Motors Corp. has returned; the “cash for clunkers” bill has been enacted by Congress, providing vouchers valued from $3,500 to $4,500 when you trade in a vehicle and purchase a new one that meets or exceeds higher miles-per-gallon standards; and you are now contemplating buying a vehicle. Let us explore some of the tax and finance decisions that enter the process. Solution: Here are some questions to ask yourself: - Where is the down payment or the cash going to come from: invested funds, trade-in, cash-for-clunker certificate or all financed? - If from invested funds and you plan to pay for the entire cost with no borrowing, what is the cost of getting out of the investment (potential capital gain or loss)? - What about lost investment revenue (interest and dividends)? - These factors all enter the finance part of the vehicle acquisition. If you are all financed, what is your credit score? Also, consider if you will qualify for the lowest rate on the financing, and also factor in any potential additional borrowing you may be contemplating, such as a home remodel, second home or other acquisition. Next, let us take a quick look at the , cash-for-clunker program. The first consideration is the trade-in value of the vehicle being surrendered and whether it is worth more than the certificate being offered by the government. If the trade-in value is $6,000, versus a maximum possible certificate of $4,500, is the trade worth more than the certificate, especially if you plan to finance? Next, determine how much the certificate will be, depending on what you're giving up and what you plan to acquire. Check the MPG savings by going to fuelecomony.gov. This will enable you to determine the amount of the certificate you will be able to obtain. Now let us explore some tax consequences. Was the vehicle you are giving up used for business and thus depreciated (using either the one-time write-off, bonus depreciation or just plain depreciation)? We now have to consider some recapture provisions of the Internal Revenue Service code to determine any tax consequences of the surrender. A reminder: Even if you use the cents-per-mile write-off, there is a depreciation factor built into this deduction. If you trade in the vehicle, you defer the gain and have to adjust the basis of the new vehicle acquired for both gain and loss purposes, and depreciation. What are you going to do with the new vehicle? Is it strictly personal use or commuting, or will it be partly a business vehicle? If partly business, do you keep a log of the business miles so that you can use the write-off provisions of the code? Even if all-personal, how many miles for medical purposes, charitable purposes? Each of those brings a deduction to the tax return. Remember that there are advantages to hybrid vehicles (a potential energy credit), an electric vehicle (a potential energy credit) or just a gas-powered vehicle (possible cash-for-clunker certificate). The cash-for-clunker program allows the purchaser to get the certificate and also qualify for the hybrid or all-electric credit. Further, if you plan to use the vehicle for business, is it a pickup, step van or sedan? How much does it weigh? Different depreciation limits apply if the vehicle weighs less than 6,000 pounds or more than 14,000 pounds. Does the vehicle, if a van, seat more than nine persons behind the driver or extend more that six feet behind the driver or more than 31 inches in front of the driver? Each of these limits can affect the amount of your write-off per year. Depending on the date of your purchase, you may qualify for the bonus depreciation extra write-off in the year of acquisition and may also qualify for the special first depreciation, Section 179 write-off. So you thought buying a vehicle was easy? Do not let this stop you from your purchase and stimulating the economy. Think of the jobs you are creating in the auto industry, the automobile service industry and dealerships that will benefit — not to mention the medical professionals who will treat your headache after considering all the various options. Good luck and happy driving!

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