As inflation and interest rates rise, the used car market is beginning to soften. The auto industry still touts that a consumer’s trade-in is worth more as a trade-in than in their driveway. This belief has consumers running to the dealership to trade in their old cars before the phenomenon ceases to exist.
There can be times that the consumer often leaves in a financial condition that is comparable to where they were before they traded in their trusty car for a new one. The payments are close to the same and the term has been extended. With customer satisfaction tied to incentive, it is important in this market more than ever to make sure the consumer leaves happier than they were when they came in. Unfortunately, there is a hitch with buying inventory off the street, and that is they may leave with a 1099 form! Form 1099 comes into effect if the amount the dealership agrees to give the consumer for their vehicle is more than they paid originally, and it may trigger a capital gain.
If the consumer can trade in more than one vehicle on the new vehicle purchased, they receive an equity check that does not necessarily trigger a 1099 form. Form 1099 is calculated on a car-by-car basis and is determined by the original purchase price paid for the vehicle. If the vehicle was purchased prior to the supply chain issues and a discounted rate was offered, there is a chance that the dealership will need to issue a 1099 form. The responsibility lies with the dealership team to determine the original purchase price, the present value, and any gain. Form 1099 should be issued for the difference in the amount offered for the vehicle and the original purchase price, and it is not adjusted for any payment made to satisfy any liens.
Most of Pennsylvania is subject to a 6% sales tax unless you live in Allegheny County, which is 7%, or Philadelphia County, which is 8%. This tax rate is applied to the vehicle, any extended warranties, and the DOC fee (up to $118 for manual processing and $141 for online processing), less any trade-in value. Currently, in PA, the capital gains tax is 3.07% and the federal capital gains tax can be up to 20% as determined by your taxable income. Each transaction should be looked at individually and a determination needs to be made whether to take the increased trade value, the equity check, or the 1099 form. It may or may not be in both the consumer’s and the dealership’s best interest to negotiate a trade-in value equal to or lower than the original purchase price. In most cases, the capital gains tax would be less than the sales tax and would continue to be a benefit to the consumer.
If the dealership is purchasing a vehicle from a consumer who is not buying a replacement vehicle, the same rules apply for capital gains and it would be calculated on the original purchase price vs. the agreed-upon price the dealership is purchasing the vehicle for. When dealing with “off-the-street purchases,” it is important to keep track of how many vehicles you have purchased from that person because Pennsylvania allows an individual to sell four automobiles in the course of a year without obtaining an auto dealer’s license, but more than four is not allowed.
When issuing form 1099, you must have the person’s name, address, and social security number. For this reason, it is in the best interest of the office team to make sure the proper information is collected prior to writing the check to ensure the dealership team does not release a check that has been cut but is “waiting for information” before releasing. If the check is released without collecting the proper information and the dealership, in effect, intentionally disregards the requirement to provide a correct statement, then it would be subject to a minimum penalty of $570 per form or 10% of the income reported with no maximum.
Author: Michele D’Antonio | [email protected]
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