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Hummer tax break gets hammered

One year ago, you could have driven your new three-ton, business-use SUV through a little-known tax loophole and written off the entire purchase price in the first year.

But Congress has tightened that controversial loophole for high-end luxury SUVs, though many of the rank-and-file heavyweights will still breeze through with the same 100-percent write-off in the year of purchase.

The furor all started a couple years ago when some sharp-eyed accountants and their professional clients discovered a glitch in the tax code that proved big enough to drive a Hummer through, tax free.

The tax provision's original intent back in the 1970s was to enable small farmers and self-employed workers to buy a truck or van without having to fork over the luxury car tax that was then in effect and has since expired. At the time, it made perfect sense to qualify the vehicles by weight because no luxury cars exceeded the 6,000-pound gross vehicle weight threshold.

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Under the Jobs and Growth Act of 2003, Congress raised the deduction ceiling for these heavy-class vehicles from $25,000 to $100,000, bumped the "bonus deduction" from 30 percent to 50 percent, and left in place the accelerated five-year depreciation schedule. This, in effect, made virtually all three-ton, business-use SUVs fully deductible in the first year. More than 50 vehicles qualified for the tax break.

Sure enough, tax-savvy self-employed professionals such as doctors, dentists and yes, accountants, connected the weight of today's luxury SUVs with the obscure tax loophole and started sporting heavy iron in order to deduct the entire purchase price in the first year. Which might explain why traffic lanes have seemed a little narrower lately.

Robin Hood in reverse
That blatant abuse of the intent of the tax code didn't sit well with the Taxpayers for Common Sense, the watchdog organization that first cried foul on the high-styling urban cowboys. The tax group estimated that the so-called SUV tax break cost taxpayers between $840 million and $987 million for every 1,000 vehicles sold. Worse, it was robbing the poor to feed the rich.

Environmental groups soon weighed in as well, expressing outrage that the tax code was, in effect, encouraging consumers to purchase gas-guzzling behemoths. What's worse, they pointed out, is that because the big rigs are categorized by weight with farm machinery, SUVs are exempt from federal fuel efficiency guidelines.

Congress reversed itself last fall with passage of the American Jobs Creation Act of 2004 and cinched back the SUV loophole from $100,000 to $25,000 while retaining both the 50-percent bonus deduction and the five-year depreciation schedule. The deduction is claimed as a Section 179 expense, meaning you must be in business, filing a Schedule C or corporate tax return, to claim it.

Will the lower expense ceiling stop the heavy-metal stampede? Not likely, says Ronnie Windham, a certified public accountant in Oxford, Miss.

"I don't think it's going to affect people's buying habits. Most people buying SUVs are paying $40,000 or $50,000, so by the time you take the 50 percent bonus deduction and the $25,000 depreciation expense, most of them are still going to write off the full amount."

Windham notes that SUVs also enjoy what is called a maker's depreciation. "There's no dollar limit on the amount you take off each year, it's just based on what the vehicle cost. It actually takes you about six years to fully write off a five-year vehicle," he says.

 

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-- Updated: Jan. 20, 2005
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Tax breaks for gas-saving vehicles
Tax Adviser explains business SUV tax-break rules
Tax glossary
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