Cash for Clunkers
The “Cash for Clunkers” program, The Consumer Assistance to Recycle and Save Program, allowed qualifying consumers to receive a $3,500 or $4,500 voucher from the federal government when they trade in qualifying old vehicles and purchase or lease a new one. This federal law provides the value of the voucher received by the consumer is not considered as gross income of the purchaser for purposes of the federal income tax.
California law does not conform. For state income tax purposes trade-ins are treated as normal sales or exchanges, and in some cases the value of the voucher received may be subject to state tax. The person subtracts his or her basis (generally the cost of the used vehicle) of the car traded-in from the amount realized (the applicable voucher amount, plus any other salvage value the dealer offers as part of the exchange) to determine whether a gain or loss was realized on the disposition of the used vehicle. Whew!
For example, if the family car was originally purchased for $19,500 and traded in for a $4,500 discount under the “Cash for Clunkers” program, there is no taxable gain. The $15,000 difference is a personal loss under tax law and may not be deducted for tax purposes.
However, if the family car was purchased for $3,000 and it was traded in for a $3,500 discount, the $500 difference needs to be reported as income for state tax purposes.
Different tax rules apply for vehicles used in a person’s trade or business. For example, when a person trades in the old company truck for a new company truck, under the “Cash for Clunkers” program, the gain or loss could be postponed for tax purposes under the “like-kind exchange” rules.
Any scrap value received by the consumer for the trade-ins is also used in computing the gain or loss from these sales or exchange transactions.