Cash for Clunkers, Taxable?

In June 2009 President Obama signed the Consumer Assistance to Recycle and Save Act of 2009 (how much caffeine had they had when they came up with that name?), commonly referred to as “Cash for Clunkers.” Auto dealers that signed up for this voluntary program received vouchers for qualifying trade-ins on the purchase off new cars where the fuel efficiency of the new car is better than the fuel efficiency of the clunker. The vouchers were for $3,500 or $4,500 depending on the how much you stepped up in fuel efficiency and they were treated as part of your down payment on your purchase. This applied for the period of Jul 1, 2009 until November 1, 2009.

The good news is that the amount you received will not be taxable to you. But, if you depreciate your car, such as using it in your business, it is treated as a reduction in your tax basis for your new car.  This means your depreciation will be adjusted accordingly.

Now that you’ve gotten rid of that clunker, have you considered just how much your benefit may have really cost?

There are about 700,000 cars turned in for the program. But, think about this, how many of those purchases would have occurred in the near future anyway? So what did this tax oriented social engineering really accomplish?

Not as much as you might think is the answer. Only 125,000 of those were vehicles that would not have been sold anyway, according to an analysis released by the automotive Web site Edmunds.com. Based on their analysis, which seems to follow good logic to my way of thinking, taxpayers wound up paying about $24,000 for each. Yikes!