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Tax implications of Volkswagen’s payout for diesel emissions scandal

Tax implications of Volkswagen’s payout for diesel emissions scandal
In September 2015, the news broke that Volkswagen had been caught by the U.S. Environmental Protection Agency for cheating on the emissions tests of its “clean diesel” vehicles. As remuneration, Volkswagen agreed to provide more than $10 billion to owners and to current or former lessees of the affected 2.0-liter diesel engine Volkswagen and Audi vehicles.
  • Vehicle owners have two options available to them under the court settlement: allow Volkswagen to buy back their car at the fair value (based on NADA trade-in numbers) calculated the day before the scandal was made public, or allow Volkswagen to fix their vehicle for free. Both options include an additional “owner restitution” payment of between $5,100 and $10,000, depending on the model and year of the affected vehicle.
  • Current vehicle lessees also have two options available to them under the court settlement: to terminate their leases without incurring early termination fees, or allow Volkswagen to fix their vehicle for free. Both options include an additional “lessee restitution” payment of between $2,500 and $5,000, depending on the model and year of the vehicle they had been leasing.
  • Lessees who were leasing an affected vehicle on the date the scandal went public who have since returned the vehicle at the conclusion of the lease would receive the same “lessee restitution” payment listed above.

If you own, lease, or have leased one of these affected vehicles, you may have income tax consequences by accepting one of these settlement claim program offers.

Owners

Under the owner buyback option, there could be tax implications to you if the payments made as a result of the Class Action Settlement exceed your tax basis in the vehicle. In this instance, you would recognize a gain on your tax return resulting from the sale of the affected vehicle. If the Class Action Settlement payments are less than your tax basis in the vehicle, you would not have any tax consequences as losses realized on personal-use property are not deductible. If the affected vehicle had been used for business purposes or was held strictly for investment purposes, the loss would be deductible on your tax return.

Under the repair option, the owner restitution payment and the fair value of the repairs rendered would reduce the basis in your vehicle. When you sold your vehicle at a later date, you would need to take this reduced basis into account to determine if the sale of your vehicle results in a taxable gain at that time. If the total payments received do not exceed your tax basis in the vehicle, you would not have any tax consequence from the payments, now or when you sold the car in the future.

Lessees

Current lessees would not have any income to report by allowing Volkswagen to repair their leased vehicle. However, current and former lessees should report the full value of their “lessee restitution” payment as income on their tax return. At this time, we do not know if the courts will consider the damages that will be paid out to be compensatory or punitive, but it is unlikely that these payments will fall under one of the few exceptions in the Internal Revenue Code that allow damages from a settlement lawsuit to be nontaxable.

If you have further questions about your Volkswagen settlement, please contact your WK advisor at (573) 442-6171 or (573) 635-6196.

VW grille

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Posted By Katie Barthel, CPA on 11-14-2016 | Topics: Articles, News,