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SUV Tax Deduction – Tax Planning Strategies for 2004 – SUV Tax Break -SUV Tax Loophole

Posted on Thursday, September 2nd, 2004 by

SUV Tax Deduction – Tax Planning Strategies to save your Small Business Money

SUV TAX DEDUCTION OVERVIEW- Gross Vehicle Weight Ratings (GVWR’s) of more than 6,000 pounds qualify. This article on the SUV Tax Deduction was written from a negative viewpoint but it also explains the SUV Tax Deduction brilliantly.

One reason the U.S. government provides tax credits is to promote consumer behavior that benefits the greater good. While not many would argue with a tax credit that allows teachers to recover unreimbursed costs of school supplies, for example, some tax credits demonstrate a failure of our national priorities. The tax break given to small business owners that allows the entire purchase price of a sport utility vehicle (SUV) to be deducted is one of the most glaring examples of a good idea going in the wrong direction.

Under current tax policy, the U.S. government grants massive tax breaks to purchasers of SUVs. The original intent of the suv tax deduction provision was to increase capital investments by farmers and other small business owners who rely on light-trucks or vans (ie. construction companies). When this provision was added to the tax code, luxury passenger SUVs were not the market force they have become, and it appeared a good way to help small business owners by accelerating depreciation and avoiding a luxury-tax surcharge.1

Over time, however, this provision has developed into a loophole-a loophole big enough to drive a 6,000-pound SUV through. The problem has arisen largely because the tax code classifies vehicles by weight instead of function. First, a truck or van is defined as a vehicle that weighs more than 6,000 pounds.2 Before the advent of the SUV, this was a sufficient way to separate passenger automobiles from other classes of vehicles. The growth of the market for large, luxury SUVs, has dramatically expanded the number of what are essentially passenger vehicles weighing over 6,000 pounds. In addition, the weight classification for a passenger auto is determined by the “unloaded gross vehicle weight,” or the amount the vehicle weighs with nothing in it.3 SUVs are weighed according to the “gross vehicle weight” rating, which is the weight of the car itself plus the load the vehicle should be able to carry.4 This distinction makes it easier for certain vehicles to achieve the status of “light-truck” even if the actual vehicle weight is more in line with passenger automobiles.

BEFORE AND AFTER  

First-year deductions on a $110,000 Hummer H1 (note: all other SUVs are fully deductible)

First-year deductions on a
$110,000 Hummer H1
 
(note: all other SUVs are fully deductible)
 

  Economic Stimulus Pkg 2002 Jobs and Growth Act 2003
Equipment Investment $25,000 $100,000
Bonus Deduction $25,500 (30%)  $5,000
(50%)
5-year depreciation $11,900  $1,000
Total deduction $62,400 $106,000

Historically, the government has placed a cap on and set a depreciation schedule for the allowable deductions for a business vehicle purchase. The Internal Revenue Code (IRC) differentiates between vehicles weighing less than 6,000 pounds and the heavier class of trucks and vans, allowing the heavier vehicles accelerated depreciation schedules under IRC section 179.5

Prior to enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (Jobs and Growth Act), the 2003 tax code schedule for business depreciation allowed for a deduction of up to $25,000 in the year of purchase of a truck or van weighing over 6,000 pounds, and set a five-year depreciation schedule. In March 2002, Congress passed an economic stimulus package that allowed an additional 30% “bonus deduction.”6

With passage of the Jobs and Growth Act, Congress dramatically expanded the already generous SUV loophole by raising the deduction ceiling for certain purchases-including SUVs-from $25,000 to $100,000.7 Under this new rule, the entire cost of all but one large SUV-the Hummer H1-can be deducted. This act also increased the “bonus deduction” from 30% to 50%8, which businesses can utilize in the first year of purchase on the amount above the initial deduction. This bonus deduction was established in addition to the five-year depreciation schedule9, which remained the same.

Under the new plan, a business owner who purchases a $110,000 Hummer H1 in 2003 can now deduct a total of $106,000 in the first year (see table).

SUV TAX DEDUCTION EFFECTS

These changes to the tax code, which were originally intended to spur capital investments by farmers and small businesses that rely on heavier vehicles, have made the purchase of heavy SUVs extremely lucrative for any small business owner, whether or not the vehicle is necessary in their work. It has raised the deduction cap to $100,000 for small businesses, while retaining all other aspects of the tax cut. This makes the purchase of at least 55 large SUVs, passenger vans, and trucks-all priced under $100,000-completely deductible in the first year.

As a result, Hummer sales, and SUV sales in general, have skyrocketed and this trend has continued with the passage of the Jobs and Growth Act.10 This has raised a number of important questions about the effect of this provision. For one, this is another tax break that primarily benefits the rich. Skip Barnett, who owns a hummer dealership in Atlanta, said that most of his buyers are small-business owners with incomes of over $200,000.11 The tax break has encouraged people from all lines of work, including real-estate agents, lawyers, consultants, and many others-for whom this provision was never intended-to purchase a luxury SUV instead of a luxury auto, which is not eligible for the same deductions. Assuming that the average SUV buyer pays 35% on income taxes, and that the average SUV costs $40,000 (all of which is now deductible), this will cost the treasury an estimated $14,000 per taxpayer that takes the deduction, up from an average of $11,060 before the cap was increased to $100,000. For every 100,000 taxpayers that take advantage of this loophole, it will cost the treasury an estimated $1.4 billion!

CLOSING THE LOOPHOLE

Like many tax breaks, this one started with good intentions-helping family farmers and businesses purchase necessary equipment. This aspect of the provision needs to be maintained. With the rapidly expanding SUV market, however, the tax exemption has become a misguided incentive for people to buy much larger vehicles than they need.

The loophole that allows the law to be misused should be removed. The way to do this is to more accurately define “passenger vehicles” and “work vehicles.” Currently, a passenger vehicle is defined as any 4-wheeled auto designed primarily for use on public streets, roads, and highways that weighs less than 6,000 pounds.12 Passenger SUVs that are over 6,000 pounds need to be distinguished from industrial vehicles and placed under the normal depreciation schedule for businesses in IRC section 280F.

Attempts are already underway to close this costly loophole. Almost identical legislation has been introduced in both houses of Congress13 by Sen. Barbara Boxer (D-CA) and Rep. Anna Eshoo (D-CA) to clarify the original intent of the law and reclassify SUVs as luxury automobiles for purposes of depreciation limitations. Similarly, the Senate Finance Committee approved language14 in October 2003 relating to the Jumpstart our Business Strength Act15 that would shrink the tax deduction for large SUVs back down to $25,000 and define what is meant by a sport utility vehicle . Senator Don Nickles (R-OK), a member of the Senate Finance Committee, also introduced this language as an amendment during debate on the national energy bill16 in the Joint Conference Committee, but it was not included in the final conference report.

 

Vehicles that Qualify for the SUV Tax Break 
Vehicle Model 
Gross
Weight (lbs)
 

MSRP 
Economic Stimulus Pkg 2002
Jobs and Growth Act 2003 
BMW
X5
6005
$53,845
$37,690
$53,845
Cadillac
Escalade
7000
$54,280
$37,880
$54,280
Escalade ESV
7200
$56,160
$38,710
$56,160
Escalade SRX
7000
$43,940
$33,335
$43,940
Chevrolet
Astro Passenger Van
6100
$27,620
$26,150
$27,620
Avalanche 1500
7000
$36,062
$29,870
$36,062
Avalanche 2500
8600
$36,545
$30,080
$36,545
Express Pass. Van 3500
9600
$30,525
$27,430
$30,525
Silverado 1500
6400
$28,600
$26,584
$28,600
Silverado 2500
8600
$31,999
$28,080
$31,999
Silverado 3500
11400
$34,200
$29,050
$34,200
Suburban 1500
7200
$41,907
$32,440
$41,907
Suburban 2500
8600
$41,280
$32,160
$41,280
Trailblazer
6400
$32,470
$28,290
$32,470
Tahoe
6800
$38,530
$30,995
$38,530
Dodge
Durango
6400
$33,280
$28,645
$33,280
Ram Cargo Van 3500
8700
$22,150
$22,150
$22,150
Ram MaxiVan 3500
8700
$22,010
$22,010
$22,010
Sprinter
8550
$32,391
$28,250
$32,391
Ram 1500
6650
$26,930
$25,849
$26,930
Ram 2500
11000
$29,160
$26,830
$29,160
Ram 3500
11000
$32,610
$28,350
$32,610
Ford
Econoline E350 Van
9500
$24,460
$24,460
$24,460
Econoline E350 Pass. Wagon
8700
$27,590
$26,140
$27,590
Excursion
8900
$43,650
$33,205
$43,650
Expedition
6650
$37,185
$30,360
$37,185
F150 Styleside
6500
$28,345
$26,470
$28,345
F250 Super Duty
9900
$28,950
$26,740
$28,950
F350 Super Duty
11,200
$30,110
$27,250
$30,110
GMC
Safari AWD Pass. Van
6100
$27,620
$26,150
$27,620
Savana Pass. Van 3500
9600
$30,525
$27,430
$30,525
Sierra 1500
6400
$31,170
$27,715
$31,170
Sierra 2500
8600
$32,161
$28,150
$32,161
Sierra 3500
11400
$33,270
$28,640
$33,270
Sierra Denali
7200
$44,255
$33,473
$44,255
Yukon Denali
7200
$44,695
$34,815
$44,695
Hummer
H1
10300
$111,845
$63,210
$107,107
H2
8600
$50,590
$36,260
$50,590
Isuzu
Ascender
6400
$34,197
$29,050
$34,197
Land Rover
Discovery
6064
$37,995
$30,720
$37,995
Range Rover
6724
$71,865
$45,620
$71,865
Lexus
GX470
6000
$45,700
$34,110
$45,700
LX470
6860
$64,800
$42,512
$64,800
Lincoln
Aviator
6210
$43,387
$33,090
$43,387
Navigator
7450
$51,960
$36,860
$51,960
Blackwood
6780
$52,500
$37,100
$52,500
Mercedes
G-Class
6834
$84,500
$51,180
$84,500
M-Class
6283
$51,970
$36,865
$51,970
Nissan
Pathfinder Armada
6800
$37,600
$30,545
$37,600
Titan
6486
$28,950
$26,738
$28,950
Porsche
Cayenne
6790
$73,165
$46,195
$73,165
Toyota
Land Cruiser
6860
$53,915
$37,725
$53,915
Sequoia
6600
$38,080
$30,755
$38,080
Tundra
6200
$23,835
$23,835
$23,835
Volkswagon
Touarag
6200
$38,415
$30,900
$38,415

 

Notes
1. The luxury excise tax on passenger automobiles expired on 12/31/02. It has not been reinstated yet.
2. 26 U.S.C. 280F(d)(5)(A)(ii).
3. Ibid.
4. Bill Sanders. “Annual Depreciation Limits and Gross Vehicle Weight Ratings for Trucks, Vans, and Sport Utility Vehicles.” undated. Available online: http://www.biz.colostate.edu/faculty/cherieo/GrossVehicleWeights.doc.
5. 26 U.S.C. 179 and 280F.
6. P.L. 107-147 sec. 101.
7. P.L. 108-27 sec. 202. This increase is effective from 2003-2005. Beginning in 2006, the limit returns to $25,000.
8. P.L. 108-27 sec. 201. This 50% bonus is available for business purchases made between September 11, 2001 and December 31, 2004.
9. see 26 U.S.C. 168.
10. Brad Wong. “It’s Not Just A Hummer, It’s a Tax Break.” Seattle Post-Intelligencer. January 17, 2003.
11. Jeff Plungis. “SUV Tax Break May Reach $75,000.” The Detroit News. January 20, 2003.
12. 26 U.S.C. 280F.
13. SUV Business Tax Loophole Closure Act, H.R. 727 and S. 265.
14. U.S. Congress, Joint Committee on Taxation. Senate Report 108-192, Title IV(F)(13) regarding the Jumpstart Our Business Strength (JOBS) Act. November 7, 2003: 71-72. Available online: http://www.house.gov/jct/x-85-03.pdf.
15. U.S. Senate, 108th Congress. Jumpstart Our Business Strength (JOBS) Act, S. 1637.
16. U.S. House of Representatives, 108th Congress. Energy Policy Act of 2003, H.R. 6.

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