Courtesy of the wall street journal:
If you are a business owner, you are in for a sweet deal on a shiny gift this holiday: thousands of dollars off the price of a big sport-utility vehicle.
But don't thank Santa -- thank Uncle Sam.
As a result of a quirk of federal tax law, business owners are allowed to depreciate SUVs and pickups more quickly than cars. The discrepancy has been around for nearly two decades, but it is getting new attention amid the soaring popularity of SUVs and pickups as suburban people-movers. As the end of the year approaches, the tax break gets particularly popular, since business owners often are in the market for ways to cut their taxable income.
The deduction stems from the long-standing and somewhat bizarre classification of SUVs as "light trucks" rather than "cars." That means a tax break that was at least partly intended to help farmers buy pickup trucks is now being applied to today's quintessential suburban passenger vehicle.
The law gives people who qualify an immediate deduction of as much as $24,000 -- which grows to $25,000 next year -- off the price of an SUV. Plus, until 2004, there is a bonus deduction of 30 percent of the rest of the cost of the truck. Both these deductions are on top of the regular five-year depreciation that would apply to light trucks bought as business transportation.
The only catch: To get all these breaks, you have to buy a truck that weighs over 6,000 pounds. The Chevy Suburban makes it, but the Chevy Blazer does not.
It adds up to a significant price cut. Ford Motor Co.'s Land Rover Range Rover, for instance, has a list price of $71,865, but the combined tax breaks effectively knock $21,560 off the price, over the course of five years, assuming a tax rate of 30 percent.
The deduction, described in an article Wednesday in the Detroit News, comes at a time of mounting debate over U.S. dependence on foreign oil. SUVs and pickups typically are far less fuel-efficient than passenger cars. That discrepancy -- and the debate over automotive greenhouse-gas emissions -- has become an increasingly hot political issue since light trucks now account for about half of the total U.S. new-vehicle market.
Critics call it a loophole big enough to drive an SUV through. Mark Sherrard ordered a Chevrolet Suburban in October to take advantage of the accelerated tax breaks after his accountant told him about them. With a discount on the vehicle courtesy of his brother who works at General Motors and the zero percent financing offer GM was offering, he didn't need to think about it long.
"I wanted to get a new vehicle anyway," says Sherrard, a doctor who lives in Monroe, Mich. "Frankly, it was a no-brainer."
For years, federal law has allowed business owners to depreciate cars and trucks just like any other kind of equipment, letting owners depreciate bigger chunks in the early years, and the full value over five years. But in 1984, concerned that too many people were claiming the family car as a business expense, the government sharply limited car depreciation. Those limits do not apply to light trucks.
"You have a Christmas present here," says Aileen Roder, program director for Taxpayers for Common Sense, a nonpartisan Washington, D.C., budget watchdog group that opposes the SUV credit. She estimates the light-truck tax break costs the federal government between $840 million and $987 million yearly, making it "one of the largest tax breaks per capita" on the federal books.
Despite hand-wringing in Washington over U.S. dependence on foreign oil, the tax deduction for fuel-thirsty light trucks is larger than existing tax breaks for fuel-efficient cars. Owners of hybrid gas-and-electric cars -- Honda Motor Co.'s hybrid version of the Civic, and Toyota Motor Corp.'s Prius -- get a $2,000 tax deduction. Proposals to boost the hybrid tax break were part of a Senate energy bill that stalled this year.
For now, however, the light-truck tax break remains on the books. Several dealers contacted were unaware of it -- but eager to find out more to use it as a sales tool.
Mike Malek, tax partner at Michigan-based accounting firm Plante & Moran, says he makes sure that all his clients are aware of the break. Although the deduction rarely persuades a luxury-car buyer to buy a truck instead, it sometimes persuades people to pick a big SUV instead of a smaller one, he says.
"If a client is looking at purchasing a Navigator versus another luxury vehicle for the same amount, we would make sure they understand they get a deduction quicker on the heavier vehicle," Malek says.
Several environmental activists say they are considering mounting an effort to close what they consider a tax loophole for light trucks. "It's an inexcusable boondoggle for Detroit," says Dan Becker, director of the Sierra Club's global-warming and energy program.
Still, he says, environmentalists have regarded other issues as more important. He also notes that tax breaks are typically tough to erase once they are on the books.
And here are some cons to this loophole
Of those opposed to the new SUV tax break, the following reasons are given for their opposition of such legislation:
One outcome of this incentive is that business owners are likely to seek out bigger SUVs instead of cars. For example, an accountant who would do fine with a 30 mpg compact sedan as a company car could be enticed into a big, 15 mpg SUV instead. Or a real estate agent about to buy a 20 mpg midsize SUV that doesn't qualify for the deduction might opt for a full-size SUV instead, because it does qualify.
Americans are already buying SUVs in record numbers, so why is there a national need to subsidize sales of the largest light trucks?
The tax break would encourage professionals who might have opted for a smaller, more fuel efficient car to purchase a full-size SUV or pick-up truck instead.
Thinking that the deal may just be too good to pass up, more people than ever are test-driving SUVs, making them more likely to purchase vehicles that are bigger than than initially thought they wanted or needed.
The tax break encourages people from all lines of work, including real-estate agents, lawyers, consultants, and many others to purchase a luxury SUV instead of a luxury automobile, which is not eligible for the same deductions.
The tax break applies only to the largest and least fuel-efficient category of SUVs.
The law seems counter to national goals of improving vehicle fuel efficiency to reduce U.S. dependence on foreign oil and cut greenhouse gasses.
Those who purchase fuel-efficient hybrid cars qualify for a tax credit of only a few thousand dollars. For example, those who choose an efficient new gas-electric hybrid car, getting 50 mpg, are rewarded a $4,000 tax deduction.
Why is a proposal to extend bigger tax breaks to environmentally friendly vehicles is currently stalled in Congress?
If the federal government is in the business of steering consumers toward the purchase of a particular sort of vehicle, then don't environmentalists have a right to a seat at the table alongside the auto industry lobbyists?
Business owners are being talked out of buying more fuel-efficient cars over gas-guzzling SUVs. For example, a business owner wanting to buy a Lincoln Town Car would receive a $7,660 deduction, just one-fourth what he might save by buying a Lincoln Navigator. It would take more than 15 years to recoup the entire cost of the car.
This is one of those tax credits that’s going to benefit the rich.
According to Taxpayers for Common Sense, the SUV tax loophole costs the federal government $1 billion for every 100,000 vehicles that businesses buy.
There's no need for the government to subsidize these gas-hogs. Some, like the Hummer H2, only get 10 mpg. A 15 mpg vehicle costs twice as much to operate as a 30 mpg vehicle.
New York Governor George Pataki called the loophole unfair and said he would collect state tax on nonagriculture businesses that claimed the federal deduction. (However, this won't work because the SUV deduction is figured in with other business expenses, making it impossible to tell if someone is deducting the cost of a luxury truck.)
Senator Barbara Boxer (D-California) is drafting legislation that would change the truck definition to key on a separate cargo area instead of weight, allowing pickups and vans to qualify, but not SUVs. Any SUV weighing 14,000 pounds or less (every SUV on the market today) would be treated like a car.
The Sierra Club has urged the IRS to aggressively audit the returns of taxpayers who take advantage of a tax loophole subsidizing their purchases of gas-guzzling SUVs.
