Vehicle Trade-in

No, trade-ins are not treated like a sale. The trade-in value means nothing and should not be a factor in recording the transaction.

So what would the GJ entry look like?

Debt Credit Truck (old) 13,500 Accum Depr (old) 8,000 Loss on Disposal 500 Truck (new) 18,600 Notes Payable 13,600

The above is a book entry (financial reporting) the entry for tax purpose is different. For tax purposes, if it's a trade-in, there's no loss recognized (it's considered a like-kind exchange), you build the loss into the basis of the new truck, therefore, the new truck (for tax purposes only) has a cost basis of 19,100 rather than 18,600.

I could not disagree more with your GAAP entry. Trade-in values, especially when trucks and autos are concerned mean absolutely nothing. How many of us have walked into a dealership and been offered $500 for our trade-in and then went into another dealership and been offered 10,000? Its all bullshit, a game, a con, certainly not an arms length transaction. The dealership will just raise or lower the asking price of the new vehicle to compensate for what ever they allow on the trade.

I will never forget the words of the last auto salesman I walked out on, "I'll give you $10,000 for your trade-in and I don't even want to look at it". "Hey that's wonderful", I said. "Let me pull down my pants and bend over so I can make it easy for you."

There are only two things certain when we trade-in a vehicle for a new one, the adjusted basis of the old car and the cash outlay we must make to drive out of the showroom. I say the tax and GAAP entry should be the same.

I say you look up the trade in value in Kelly Blue Book and that is the amount for GAAP.

As for the deal with the dealer, first take it to some other place and tell them it is an estate sale and get their offer. Now you know what it is worth. When you make the deal to trade, have them value it at $1 and drop the new car/truck price to match. Now you just paid less sales tax and vehicle license tax and lowered the cost of the loan.

If the trade-in allowance is used as an offset to the cost subject to sales tax it is a wash any way. Lowering the trade to $1 when it is actually worth much more smells like tax deferral fraud.

Haskel LaPort wrote: ...

Indeed, "smells like" is a euphemism... :)

This state instituted law that requires stated value on title transfer to be Blue Book or equivalent unless there's documentable justification for significantly under. It's checked on registration so the dealer would get caught immediately upon resale of any vehicle not scrapped or taken out of state (whereupon registration might prove problematical for a new owner as well, depending on particular laws).

All in all, a scam that used to not get caught often if at all; now I'd guess fair likelihood other jurisdictions have similar laws/regulations in place.

--

Precisely.

If you discuss taxes, then it could be. If you discuss the amount to be financed and wanting to lower your total interest payments ...

I was referring to fraud by the seller. If the trade-in is stated as $1 when in fact it is worth much more the profit is not realized until the trade is eventually sold, when it should have been realized when the new car was sold.

First, which seller? Each party is both buyer and seller.

Dealer made a great deal buying it under market.

New car owner made a great deal getting it without a lot of markup.

As long as the amounts remain reasonable prove otherwise.

Based on the facts given, I stand by the entry as given. If the facts were such that the buyer of the new truck was walking away w/ 10,000 in his pocket and a loan of 23,600 rather than what was provided then there are atcually 2 transactions which need to be accounted for separately, one is the sale of the truck, the other is a loan and the both transactions need a closer look for reasonableness.

Again, based on the facts given, the original entry is fine.

As far as Tax & GAAP being the same, unless the books are maintained on a tax basis of accounting, you're wrong. For book (financial statement) purposes, you depreciate the truck using a reasonable method and life. For Tax purposes, there are set rules for depreciation of vehicles. Some have artificial caps (e.g., "Luxury Auto" rules), some incentivize the business to buy assets and give and immediate write-off (e.g., IRC 179), in a given year such as last year and this year, there is Bonus Depreciation. None of these manufactured adjustments to depreciation apply for GAAP purposes. Of course, if the books are maintained on a Tax Basis, then you're correct and the there is no difference between the book & tax entries. However, we're getting pretty far afield here on a very basic response to a very basic question w/ a very basic (and reasonable) set of facts given.

I'm betting that the OP keeps his books strictly on a tax basis.

I would also venture to say that in this case the trade-in of one truck for another plus boot lacks commercial substance and thefore any gain or loss would be deferred for both tax and GAAP reporting.

Commercial Substance

1. A nonmonetary exchange has commercial substance if the entity's future

cash flows5b are expected to significantly change as a result of the exchange. The

entity's future cash flows are expected to significantly change if either of the

following criteria is met:

a. The configuration (risk, timing, and amount)5c of the future cash flows of the

asset(s) received differs significantly from the configuration of the future cash

flows of the asset(s) transferred.

b. The entity-specific value5d of the asset(s) received differs from the entityspecific

value of the asset(s) transferred, and the difference is significant in

relation to the fair values of the assets exchanged.

A qualitative assessment will, in some cases, be conclusive in determining that

the estimated cash flows of the entity are expected to significantly change as a

result of the exchange.

replying to Kevin, Linda Sullivan wrote: How would Kevin report trade-in and new vehicle on his tax return if she used only for both?