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Cash back rule on trade-ins unchanged

November 18, 2010

Several area dealers have called the Illinois Revenue Department recently with misunderstandings about how to treat customers who desire partial or full cash payment for their traded-in vehicles. Important, the relevant tax code has not changed in more than a decade.

 

The recent callers inquired about whether cash back can be extended when a lien is involved (yes), and whether the cash back should be treated as income (no).

 

The amount of credit given for a traded-in vehicle is the value assigned to the vehicle, reduced by any cash payments received by the purchaser or title holder of the trade-in. Any cash payments reduce the trade-in value.

 

On a trade-in valued at $10,000, even if a $3,000 lien exists on the vehicle, the trade-in credit still would be $10,000. However, if the customer with that $10,000 vehicle requests $2,000 cash back, the trade-in credit would be reduced to $8,000.

 

Customers who desire cash back would face a higher sales tax because the trade-in credit does less to reduce the transaction price. Also, any cash back they receive is not considered to be income. Full details on trade-ins are in a Revenue Department publication, ST-9, at www.tax.illinois.gov/

 

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