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George Saenz, the Bankrate.com Tax Talk columnistDo SUVs get favorable tax treatment?

Dear Tax Talk,
Have there been any changes to the Section 179 deduction for large SUVs if the SUV is purchased in 2006? We are considering buying a $40,000 (6,000-plus pounds) SUV to be used 100 percent for business, but we are unsure if the $25,000 first-year deduction is still allowed, and if it also still includes the 30 percent "bonus" depreciation plus the regular 20 percent annual depreciation. Are all of these still in effect? If any or all of them are and we purchase the vehicle this month (February 2006) can Congress/the IRS retroactively change any of the tax rules that could reduce the write-offs we could take when we file our 2006 taxes? Thank you very much.
-- Andrew

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Dear Andrew,
Although Congress can always retroactively change tax laws, such as by increasing tax rates, generally retroactive changes relate to technical corrections needed to prevent unintended benefits. There are not many significant changes in the area of Section 179 expense for 2005 and 2006. That is because the rules limiting Section 179 expense on sport utility vehicles with a gross vehicle weight rating, or GVWR, of more than 6,000 pounds changed for SUVs purchased on or after Oct. 22, 2004.

The maximum Section 179 expense for business equipment is up to $105,000 for 2005 and will sometime later this year be adjusted for inflation for 2006. However, in the case of the greater-than-6,000 pound SUV, the maximum Section 179 allowance for 2005 and 2006 is still $25,000. In addition, there is no longer a bonus depreciation allowance unless you're in an area affected by one of last year's hurricanes.

In addition to the Section 179 allowance, the balance of the SUV's cost is subject to the annual allowance for depreciation, which would be 20 percent of its cost, less the Section 179 allowance. The depreciation deduction is based on the business portion of the automobile's cost.

For example, if the SUV cost $100,000 and it is used 75 percent for business, its basis is $75,000. If you claim the full $25,000 Section 179 expense, the remaining depreciable cost is $50,000 on which you can claim the 20 percent first-year allowance. Your total first-year deduction then is $35,000.

For an automobile that is not a heavy SUV, the first year combined Section 179 and depreciation allowance is $2,960 in 2005 and will be adjusted later this year for 2006. This $2,960 is multiplied by the business use of the automobile. So the unfortunate taxpayer that bought a $100,000 Mercedes and uses it 75 percent for business will get a whopping $2,220 deduction.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: Feb. 23, 2006
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