Question

After our move to California, we used the money that Scott received from that bad car accident in 2018 to purchase a 100% electric car, a 2019 Tesla Model 3 for $45,000 because that’s the type of car that Californian drive, to be used in Scott’s real estate business and think that not only did we save money since we didn’t have to pay for gas in this tax year by using it, but we also heard about some credits that we might qualify for buying the electric car.

Question: How should I treat $45,000 in 2019? Other income, business expense, or nothing?

Answer 1

The given information in the question is:

a) $45,000 received by Scott for a bad car accident.

b) Bought 100% electric car in 2019.

c) Car used in Scott's real estate business.

Answer: $45,000 in 2019 received by Scott is his personal income and not the business income/expense in any case and falls under the head other income.

Points for merit consideration:

1. Since $45,000 was received without exercising any business operation it would not be treated as business income and will be the personal income of Mr. Scott for the year 2019.

2. Car purchased for business use with the personal income will be treated as introduction of capital into the business. Here, the Asset (Car) amount recorded in the buiness will be the introduction of capital amount. It should be noted that the amount $45,000 is not any business expense.

Entry to incorporate asset (car) into Scott's real estate is as follows:

Asset(car) A/c Dr (Value of car) -

To Capital A/c - (Value of car)

3. Talking about the credits you have mentioned in the question:

Since the car is 100% electric car and gas amount is saved but the electricity is consumed instead of gas. So, the expenses to be incurred for gas is now substituted with electricity expenses which is the business expense incurred for the asset (car) used in the business. The entry to record the electricity expenses will be:

Electricity Expenses A/c Dr XXXX -

To Cash/Bank A/c - XXXX

Note: It is assumed that the car is used for business purpose only. If it is used for both personal and business purpose then the amounts in the entry to be recored on proportionate basis.