Tax question for payments received in buyback

Mostly applies to business owners who used their TDI's for business driving and deduct business miles on their Schedule C. If you have a loss, it's deductible, but if have any gains, how will you report it on your taxes? I believe the 'restitution' part of the payment is not taxable, but the remaining amount likely is, if it's above cost basis (vehicle cost, plus improvements, minus depreciation) You can't really handle it as a 1031 exchange since there's no intermediary. Can you report it as an 'involuntary conversion' (similar to a totaled vehicle)?

This questions might also apply to those who took advantage of arbitrage and bought more than several vehicles to take advantage of the buyback. If you're not a car dealer, the IRS might consider that a business venture and consider any gains reportable income.

Any thoughts or suggestions?

Did you depreciate the car, either over several years, or all at once by a Section 179 one year write off? Your basis on a business asset is reduced by the total depreciation you have previously taken. If you go by the book, you may have a capital gain if what you receive. Are people going to report this, particularly if they don't get a 1099? Likely not.

As for the people who bought multiple cars for the purpose of reselling them at a profit to VW, they would certainly seem to have taxable income. But they could take a deduction against it for their costs in carrying out the transactions. Again. Absent 1099 from VW, most will claim ignorance and wait for a tax deficiency notice. Which likely, will never come.

I read that less than 1% of returns are actually audited. This likely falls into a similar category as people voluntarily paying State sales and use tax on their purchases from Amazon.

I use the IRS mileage rates instead of Section 179 since that gave me the higher annual deduction. So I'll have to use the mileage rate allocated for depreciation and apply that to my basis. I haven't looked at my numbers for 2016 yet, so don't know if I'll have a gain or loss. If you claim business use of a vehicle going forward and replace the TDI/business vehicle with another vehicle, you have to report something as to the disposition of the vehicle you replaced. If there is a gain, and it's treated as an involuntary conversion, it can be deferred similar to a 1031 exchange. Just wondering how others are approaching it on the Schedule C on their tax return.

Yes, agree you only get caught if you're audited, likelihood being very low. But what a nightmare if you do and don't have supporting documentation.

jhinsc said:

Mostly applies to business owners who used their TDI's for business driving and deduct business miles on their Schedule C. If you have a loss, it's deductible, but if have any gains, how will you report it on your taxes? I believe the 'restitution' part of the payment is not taxable, but the remaining amount likely is, if it's above cost basis (vehicle cost, plus improvements, minus depreciation) You can't really handle it as a 1031 exchange since there's no intermediary. Can you report it as an 'involuntary conversion' (similar to a totaled vehicle)?

This questions might also apply to those who took advantage of arbitrage and bought more than several vehicles to take advantage of the buyback. If you're not a car dealer, the IRS might consider that a business venture and consider any gains reportable income.

Any thoughts or suggestions?

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My suggestion - consult a CPA.

TravelDave said:

My suggestion - consult a CPA.

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Mine too unless there are CPA's on this forum and live in your state. Unless VW sends you the appropriate forms that show this as income, I think you are ok, BUT I'm not a CPA, tax attorney, etc., etc.