By Robert Steere, Toolkit Staff Writer

In these tough economic times, have you been running your small business or your household on a shoestring, relying on your oil-burning, gas-guzzling 1995 Chevy Caprice station wagon with 205,000 miles on it to take you just a little bit further down the road before you have to bite the bullet and get a new car? Well, our federal government is trying to make it easier for you to trade-up to a new fuel efficient car to meet your business and personal transportation needs. Starting later this summer, our government will chip in $3,500 to $4,500 toward the purchase of your new car if you will trade-in your old wagon for a new fuel-efficient car. And you won't have to include the payment in your taxable income for the year.

How is this possible, you ask? After months of consideration and negotiation, Congress passed new legislation on June 18 to establish a program informally dubbed "Cash for Clunkers," which the President signed on June 24. The program is designed to encourage gas-guzzlers to get off the road and go green with more fuel efficient transportation options. It's also designed to give a boost to the automobile industry in a time of dramatically declining sales.

The program offers a financial incentive in the amount of either $3,500 or $4,500 to owners of big, old gas-guzzlers who will trade in their old cars for new fuel efficient vehicles during the four-month period between July 1 and November 1, 2009 (in fact, because of administrative issues, it will be closer to August 1 before the program gets underway). Instead of paying the incentive directly to the car buyer, the government will pay the incentive in the form of an electronic voucher to the dealer from whom the new vehicle is purchased. You will receive the value of the electronic voucher in lieu of any trade-in value you might otherwise receive from the car dealer when you buy the new car.

Eligibility requirements. The incentive voucher under this program can apply to either the purchase or the qualifying lease (at least a five-year term) of only new, not used, vehicles. Only one voucher can be issued for any person buying or leasing a qualifying vehicle. Only one voucher can be issued with respect to any eligible trade-in vehicle, even if it is jointly registered. And only one voucher can be applied to the purchase or lease of any qualifying vehicle.

For your transaction to be eligible for the incentive voucher, your trade-in vehicle must be an automobile, SUV, minivan, van, pick-up or work truck that has been registered to you and properly insured continuously by you for at least one year, is in drivable condition, is less than 25 years old, and has a combined fuel economy rating of 18 mpg or less.

The new vehicle you purchase must be priced at $45,000 or less and must meet minimum mpg and mpg improvement requirements. If you buy a passenger car, it must rate at least a combined 22 mpg according to federal standards and improve mpg over your trade-in by at least 4 mpg for the $3,500 incentive or 10 mpg for the $4,500 incentive. If you buy an SUV or smaller-sized van or pick-up (a category 1 truck), it must rate a combined 18 mpg and improve mpg over your trade-in by 2 mpg for $3,500 and 4 mpg for $4,500. If you buy a larger van or pick-up (a category 2 truck), it must rate a combined 15 mpg and improve mpg over your trade-in by 1 mpg for $3,500 and 2 mpg for $4,500 (if the trade-in is a larger category 3 truck, no mpg improvement requirements apply, but only the $3,500 incentive is available).

If you buy a larger category 3 truck, no mpg requirements apply. It simply must be of similar size or smaller than the trade-in, the trade-in must be older than the 2002 model year, and the transaction will be eligible only for the $3,500 incentive.

Do your homework before acting. Before taking advantage of this incentive program, you still need to do your homework and carefully consider the choices you make. Understand this program and other tax incentive programs that are out there. First, recognize that what you think of as a "clunker" may not be a clunker eligible for this program. For more than a decade, only the largest passenger car models of most carmakers fall within the 18 mpg or less requirement of the program. If you have a tired, old mid-sized sedan, it's not likely to qualify.

Second, be aware of the value of your trade-in on the open market. The value of the incentive voucher to you is only equal to it's face amount (either $3,500 or $4,500) less the amount that you could get for it if you sold it privately or traded it in for fair value. Check resale values with NADA, Kelley Blue Book, Autotrader, Edmunds or others that compile the data. If the fair value of your car is more than the voucher amount, then the voucher is essentially worthless. Remember, under the program, you only get the voucher amount - no trade-in value. The dealer will be required to scrap the car. Is your trade-in ready for the scrap heap? If you would say no, then this may not be the right choice for you.

Third, be careful not to let the tail wag the dog. If the idea of a $4,500 payday from Uncle Sam is the only thing prompting you to think of buying a new car, then you should probably think again. It's like any other sales promotion - you have to spend money to make money. Remember, you either have to have the rest of the purchase price in hand or you have to borrow money and make payments. Consider the cost.

Fourth, if your plans for the year do include a new car purchase, then see if the clunker program can help you. On the upside, you can combine the voucher from the clunker program with the other tax incentives that are out there for buying a new car. If you trade that old Chevy wagon in for a Ford Fusion Hybrid, you'll not only get your $4,500 voucher, but you'll get a $1,700 energy tax credit for buying a qualifying hybrid vehicle and you'll get a tax deduction for the state and local sales tax you pay on the transaction (easily another $1,000 to $3,000). And if you use the vehicle for your business, you may be able to accelerate depreciation deductions in 2009. Not a bad take, just to buy a new car that you intended to buy anyway.

Finally, as you consider taking advantage of the cash for clunkers program, you can do much of your homework on USEPA's fuel economy website, where you will find detailed information about the program, about the mileage ratings of most vehicles, and about the new vehicles that are eligible for special tax credits for energy efficiency.

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