Its not a new law, but car dealers had better heed the Internal Revenue Service tax advisory released last week on the federal cash-for-clunkers rebates.
The federal rebates will be treated like revenue in any other car sale.
Some dealers had hoped the clunker payments would be a tax-free bonanza. But dealers will have to treat the $3,500 and $4,500 rebates they receive as taxable income, the advisory says.
Its akin to a receivable that a dealership might get from a financial institution, Terri Harris, the IRS motor vehicle specialist who wrote the advisory, told Automotive News this week. Dealers are still getting taxed on the gross receipts. Whats changed is the source of the gross receipts.
The cash-for-clunkers measure -- known as the Consumer Assistance to Recycle and Save Act of 2009, or CARS -- exempts consumers who take advantage of the program from paying taxes on the rebate. But it does not exempt car dealers.
Gross income generally means all income from whatever source derived unless specifically excluded by law, wrote Harris. Gross income derived from a business means the total sales, less the cost of goods sold.
The advisory points out that any scrap value the dealer receives for the customers trade-in also is taxable income. The dealership can deduct the cost of the goods sold and expenses incurred in properly disposing of the trade-in, the advisory says.
The IRS also advises that dealers should document the transaction carefully, with records of the gross receipt, CARS payment and disposal expenses.
Paul Metrey, director of regulatory affairs at the National Automobile Dealers Association, said NADA asked the IRS to issue the advisory to clear up the confusion over clunker payments.
During a webinar last week, a U.S. Department of Transportation official said dealers wouldnt be taxed on the rebates.
What you are dealing with are people who dont understand accounting, said Dick Heider, a Denver CPA who specializes in dealership accounting. This is a normal payment like in any car deal, whether the money comes from the bank, the manufacturer or the government.
Asked why dealers might have been confused about their tax obligations, Harris said its likely because the program is new.
It is different, something they havent had to deal with before, she said. Maybe they just didnt know what to do with it.