On June 18, the Senate passed H.R. 2346, the Supplemental Appropriations Act of 2009. The House had previously passed the measure, so it's on the way to the White House for the President's signature. Title XIII of the Act (the "Consumer Assistance to Recycle and Save Act," colloquially known as the "cash for clunkers"), gives a cash incentive for individuals and businesses to trade in older gas-hogging vehicles for new, more fuel-efficient ones. The incentive takes the form of a voucher of $3,500 or $4,500 depending on the type of vehicle traded in and the fuel efficiency of the vehicle purchased. The new vehicle would have to be purchased between July 1 and November 1 of 2009. The $3,500 or $4,500 vouchers are not be treated as gross income for purposes of the Code, or for federal or state assistance programs.
Cash for clunkers program in brief. For passenger autos, the voucher amount is $3,500 if the new fuel efficient automobile is a passenger automobile and its combined fuel economy (CFE) is at least 4 mpg higher than the CFE of the eligible trade-in vehicle. The voucher is $4,500 if the new fuel efficient vehicle's CFE is at least 10 mpg higher than the CFE of the eligible trade-in vehicle.
For trucks, the voucher amount is $3,500 if:
o the new fuel efficient automobile is a category 1 truck and its CFE is at least 2 mpg higher than the CFE of the eligible trade-in vehicle;
o the new fuel efficient automobile is a category 2 truck that has a CFE of at least 15 mpg and: (a) the eligible trade-in vehicle is a category 2 truck and the CFE of the new truck is at least 1 mpg higher than the CFE of the eligible trade-in vehicle; or (b) the eligible trade-in vehicle is a category 3 truck of model year 2001 or earlier; or
o the new fuel efficient automobile is a category 3 truck and the eligible trade-in vehicle is a category 3 truck of model year of 2001 or earlier and is of similar size or larger than the new fuel efficient vehicle automobile as determined in a manner prescribed by the Treasury Secretary.
For trucks, the voucher amount is $4,500 if:
o the new fuel efficient automobile is a category 1 truck and its CFE is at least 5 mpg higher than the CFE of the eligible trade-in vehicle;
o the new fuel efficient automobile is a category 2 truck that has a CFE of at least 15 mpg and its CFE is at least 2 mpg higher than the CFE of the eligible trade-in vehicle and the eligible trade-in vehicle is a category 2 truck.
Key definitions. A passenger auto is one meeting the definition at USC title 49, sec. 32901(a)(18) that has a CFE of at least 22 mpg. A category 1 truck is a non-passenger auto as defined at USC title 49, sec. 32901(a)(17), that has a CFE of at least 18 mpg, a category 2 truck is a large van or large pickup as categorized by the Treasury Secretary; and a category 3 truck is one defined as such at USC title 49, sec. 32901(a)(19). The term CFE depends on the model year.
A "new fuel efficient auto" is a passenger auto, or category 1, 2, or 3 truck as defined above:
o the equitable or legal title of which has not been transferred to any person other than the ultimate purchaser;
o that carries a manufacturer's suggested retail price of $45,000 or less;
o that meets certain certification standards, and
o that has the CFE of at least (1) 22 mpg for a passenger auto; (2) 18 mpg for a category 1 truck; or (3) 15 mpg for a category 2 truck;
Trade-in vehicles eligible for the voucher program are those that at trade-in time: are in drivable condition; have been continuously insured and registered to the same owner for at least one year; were manufactured less than 25 years before the trade-in date; and in the case of an auto, achieve a CFE of 18 mpg or less. A single person may get only one trade-in voucher and only one voucher is available for joint registered owners of a single eligible trade-in vehicle.
Treatment of voucher. The voucher, which will be sent by the Treasury to the dealer, will offset the new vehicle's purchase price or lease price for a qualifying lease. A qualifying lease is a lease of an auto for at least five years. 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. There are other restrictions on the dealer, such as having to scrap the traded-in vehicle, except for certain salvaged parts.
Overall program limits. A total of $1 billion is allocated to the trade-in initiative (less $50 million for administration of the program), and no more than 7½% of the total program funds can be used for buying or leasing category 3 trucks.
Within 30 days of the enactment date, Treasury is to provide details and requirements relating to the program, including a comprehensive list, by make and model, of new fuel efficient autos meeting the requirements of the voucher program.
Income tax aspects. The vouchers are not treated as gross income of the vehicle purchaser for purposes of the Code. The tax-free feature has the following results:
o If the purchaser is an individual whose basis (cost for tax purposes) exceeds the voucher's value, viewing the voucher as a trade-in allowance, the income-tax-free feature yields no advantage (since a loss on a personal auto is not deductible). But if he bought the old clunker for less than the voucher's value, the economic gain isn't gross income and therefore has no tax consequences.
o Since the voucher is not treated as gross income, a business that utilizes the 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 it pays net of the voucher and any other rebates. If the purchaser is a business that has depreciated the old vehicle down to zero (or it has a very low basis), trading it in via a regular transaction generally would not result in recapture. (Code Sec. 245(b)(4)) The basis of the new vehicle would equal the amount paid for it.
For a business, trading in a qualifying vehicle with a low or zero 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 sale price and instead trade in the old vehicle and get 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.
