Taxes and the VW Diesel “Blues”
You bought your VW Diesel “TDI” thinking their “blue” diesel marketing program was the new “green” environmentally friendly car. After the final court settlement on October 31, 2016, you might be crying the blues over your TDI. Here is a question that came up recently: You just received the notice from Volkswagen AG about your 2013 VW Passat TDI. They are going to either repurchase your vehicle or pay you a settlement and fix your car, when a correction for the exhaust measurement “defeat” mechanism is approved. You already received a $500 gift card and a $500 service card from VW in 2015. You decide to elect the repurchase and you expect the repurchase to occur in January 2017.
According to the formal notice from VW, your repurchase price will be between $21,587 and $24,257. After you submitted your claim online, VW assessed an adjustment for excessive mileage and VW told you they will pay you $20,416 for your car. You bought your car in 2013 for $28,000 including sales tax and other costs. You did not depreciate the car in a business during your ownership.
Now the question: What’s the tax treatment of the repurchase?
The tax treatment is somewhat muddied by the four different elements of VW’s owner compensation settlement. The settlement requires VW to buy back your car at the “September 2015 Clean Trade Vehicle Value” plus pay you a “settlement” of no less than $5,100. You can find out if your VW or Audi is covered by the settlement and obtain those ranges for your car atwww.vwcourtsettlement.com.
Those two components are in addition to the two debit cards for $500 each that you received in 2015. The two debit cards may be a little confusing because VW did not issue Federal Forms 1099 indicating the amounts constituted some form of compensation. Let’s assume no Form 1099 was needed because the unrestricted $500 debit card was less than the $600 reporting threshold and the $500 debit card for service is construed as a discount card for future service purchases, rather than some form of compensation. In any event, the law allows you to put off reporting those payments until a law suit settlement appears to be finalized, under Treasury Regulations.
Since you did not depreciate the car for business purposes, your adjusted basis in the car is the $28,000 you originally paid. Your settlement amount, the September 2015 Clean Trade Value amount, plus the $500 unrestricted debit card sum to $20,916. As long as that total is less than your $28,000 adjusted basis, there is no tax gain to recognize. You have simply “recovered” your adjusted basis in the car for Federal and PA tax purposes. You are left with $7,084 of adjusted basis in the car. One might argue you are left with $6,584 if the second $500 service debit card is construed as compensation.
The answer is different if you used your VW or Audi in business and you depreciated the car for tax purposes. The answer is different because you have already recovered the cost of the vehicle for tax purposes up to the amount of depreciation you took as a tax deduction. Let’s assume you fully depreciated the car by the end of 2016 for tax purposes. You would then have an adjusted basis of $0 in your car. Then the full amount you received of $20,916 plus possibly the additional $500 service debit card, totaling $21,416, is taxable income to you in the year you receive the settlement pursuant to a final settlement arrangement. Let’s say you are in the 25% Federal income tax bracket. You will owe $5,354 of Federal income tax plus $657 of PA income tax. It’s time to check if your estimated tax payments are sufficient to avoid tax penalties.
You shouldn’t have to worry about sales/use tax on the vehicle as those taxes will be the problem of VW. Arguably, they are purchasing them for resale, which would be a sales/use tax exempt transaction in PA.
Edward R. Jenkins is an instructor of accounting at Pennsylvania State University and a consultant with Boyer & Ritter LLC Certified Public Accountants and Consultants.