SUV Deduction 2002 – Tax Planning Strategies Part 2Posted on Wednesday, January 1st, 2003 by Andy Jones
SUV Tax Deduction
The U.S. government provides tax credits for many purposes to promote consumer behavior that benefits the greater good. Originally, the SUV credit was intended to apply to light trucks and was added so the purchase of work vehicles used by farmers and businesses that need trucks or vans to do their work (i.e., construction companies) would not be treated the same as the purchase of luxury cars. While purchases of new luxury cars are subject to a luxury-tax surcharge, the same treatment is not given to purchases of luxury passenger SUVs that weigh 6,000 pounds or more, simply because they are defined under the tax code as light trucks.
The tax code defines industrial vehicles by weight instead of function. The parameter that the vehicle must be over 6,000 pounds fits the original intent of the legislation to help small family farmers. However, the SUV market has outgrown the original intent of this provision. Currently, there are 38 different luxury passenger SUVs including the Lincoln Navigator, Cadillac Escalade, and the new Hummer H2, which weigh more than 6,000 pounds and therefore qualify for this large deduction.2
The Bush administration’s economic stimulus package may allow small business owners to take an even bigger tax deduction when they purchase the largest sport utility vehicles. By raising the cap on tax deductions for heavy equipment from $25,000 to $75,000, the Bush plan offers purchasers of luxury SUV passenger vehicles a much larger tax break than that received by purchasers of most other vehicles.
The President has stated that his tax cut aims to make it easier for small businesses like farms and construction companies to invest in industrial vehicles like tractors and trucks.3 The administration argues that the small business tax breaks will increase investment, and thereby help to stimulate the economy. Historically, the government has placed a cap and set a depreciation schedule for the amount a business can deduct for the purchase of an auto . The Internal Revenue Code has differentiated between vehicles less than 6,000 pounds and heavier trucks and vans, allowing the heavier vehicles accelerated depreciation schedules under Section 179.4
In 2003, the tax code would allow a business to deduct $25,000 in the first year of purchase of one of these heavy trucks or vans plus a set five-year depreciation schedule. In the March 2002 economic stimulus package, Congress created a 30% bonus deduction that businesses can utilize in the first year on top of the original $25,000 and the set five-year depreciation. 5 Under this plan, if a business bought a $55,000 Hummer H2 in 2003, they can deduct a total of $38,200 in just the first year.
Bush’s newly proposed economic stimulus plan makes the purchase of a heavy SUV even more lucrative. His plan raises the deduction cap to $75,000 for small businesses, while retaining all other aspects of the old tax cut. This will make any luxury vehicles priced under $75,000 completely deductible in the first year, while making a $106,000 Hummer H1 a ridiculous value. Under this plan, small businesses would be able to deduct up to $88,000 of a Hummer H1 in the first year.
1. The luxury excise tax on passenger automobiles expired on 12/31/02. It may be reinstated as part of a tax extenders bill later this year
2. Title 26-Subtitle A-Chapter 1-Subchapter B-Part 9-Sec.280F , Legal Information Institute, December 11, 2002.
3. Jeff Plungis, “SUV Tax Break May Reach 75K” The Detroit News, January 20, 2003.
4. Internal Revenue Code Section 179 and 280F.
5. This 30% bonus is available for businesses from September 11, 2001 until September 10, 2004.