Good thing everyone likes Escalades and Navigators, since we help pay for them.
Forbes Magazine
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A Fatter Deduction For Fatter Cars
Dan Ackman, 01.21.03, 9:17 AM ET
NEW YORK - Tax laws, like many laws, often have unintended consequences. The earlier law allowing "small businesses," who are very often lawyers, doctors and accountants, to deduct the cost of larger sport utility vehicles from their taxes was one such law. Now the Bush Administration has proposed new tax rules--part of the economic stimulus, it says--that allow even larger deductions for the largest SUVs. Can this result also be unintended?
Under the new proposed rules small businesses could immediately deduct the entire price of a large SUV like the Hummer H2, BMW X5, Ford's (nyse: F - news - people ) Lincoln Navigator and the Toyota (nyse: TM - news - people ) Land Cruiser. The reason is that the new law would allow businesses to deduct $75,000, up from $25,000, from an equipment purchase, including the cost of a truck--and the IRS considers SUVs to be trucks, not cars, which have their own rules. The proposed change was first reported by The Detroit News.
A possible tax writeoff for a farmer or dentist.
Like many tax laws, the SUV deduction has a twisted history. For years, businesses were allowed to deduct the cost of company cars. Then, when the public got the sense that business were providing their owners and executives with pricey General Motors (nyse: GM - news - people ) Cadillacs and Ford Jaguars--and that this was somehow unfair--Congress changed the law to limit the deduction on luxury cars. Luxury was defined by price.
But Congress also wanted to give tax breaks to small businesses and farms that needed trucks to haul goods and equipment. The word "truck" was defined as an automobile weighing more than 6,000 pounds.
Along the way, carmakers started selling SUVs, some of which were heavy enough to be trucks for tax purposes. As a result, a business could deduct the cost of an SUV, even if the only thing it was hauling was a dentist's derriere.
The broader tax benefit will supposedly encourage small businesses to buy equipment, thus jumpstarting the U.S. economy. Congress already expanded the tax deduction for business equipment from $17,500 in 1996 to $25,000 in 2003. Bush's new plan takes the deduction limit up to $75,000. Beyond the equipment tax deduction, businesses can depreciate any remaining cost and take further deductions available for automobiles.
The effect is to let some SUV buyers immediately write off the entire cost of a new vehicle.
"This is a plan that says that if you are willing to take risks and invest more, that there's a benefit for doing so," Bush said in unveiling the initiative Jan. 9. "t will have a positive effect throughout our entire economy."
The car market is already humming, of course. Cars are not eligible for the equipment tax deduction. But trucks are--including SUVs.
Car dealers and accountants say the deduction--both existing and proposed--have been fueling SUV sales. But the same accountants caution that many deductions on SUV purchases would not withstand scrutiny. Any business deduction must be what tax laws call "normal, reasonable and customary," says David B. Robinson, a tax accountant in Richmond, Va. He says he gets a lot of calls from people hoping to take advantage of the business tax deduction for SUVs who probably are not eligible.
First of all, the vehicle must be registered to the business and used for business, which does not include commuting to and from work, Robinson says. Second, the vehicle must be necessary to the business' purpose. Finally, the driver might have to pay taxes on the fringe benefits from personal use of the vehicle.
Not many consultants need a $100,000 SUV to get from job to job. But as the IRS audits just a tiny fraction of all returns, so many car buyers take advantage of the tax break and take their chances.
The new rules come at a time when SUVs are under attack as gas guzzlers and road hogs. The top administrator at the National Highway Traffic Safety Administration recently faulted many SUVs as being prone to rolling over in single vehicle accidents. Largely because many Americans have moved from cars to light trucks, including SUVs, the overall fuel economy of the U.S. auto fleet has essentially stopped improving since the mid 1990s.
So if you're driving a Toyota Corolla or a Ford Focus and you find yourself boxed in by a massive Hummer or Dodge Durango by DaimlerChrysler (nyse: DCX - news - people ), consider this: Not only is that driver blocking your view, you may be helping to pay him to do so.
