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Remember: CARS payments are tax-free to customers, taxable to dealers

November 15, 2010

Language in the new Car Allowance Rebate System, or CARS, specifically states that the $3,500 or $4,500 government trade-in credits are not income to the consumer. Not so for the dealer.

The program does not address the taxability of the credit amount to the dealership or the deductibility of any expenses incurred by the dealership participating in the program. But gross income generally means all income from whatever source derived unless specifically excluded by law.

Under CARS, the credit and ultimate payment to the dealership by the National Highway Traffic Safety Administration is included in the dealership’s gross receipts from the new-vehicle sale. Any scrap value derived from the customer’s trade-in also is considered income for the dealer.

The dealership is allowed to offset gross income by the cost of goods sold. If the dealership incurs any ordinary and necessary expenses in disposing of the trade-in vehicle, an additional deduction might be allowable.

Dealers should maintain careful records of CARS transactions, including the gross receipts from the new-vehicle sale, the CARS payment amount, and any expenses incurred to dispose of the trade-in.