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| The Basics | The Hummer loophole gets hammered
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Anybody who wants to buy a big SUV and write off as much as $100,000 had better hurry. Here are the new rules.
By Bankrate.com
For the last few years, a business owner who drove a luxury SUV as his or her company car got a lot of help in buying the vehicle. No, it wasn't from zero-percent financing, instant cash rebates and free round-trip airfares. The help came via federal tax incentives.
But a big roadblock has been thrown in front of that tax break, thanks to provisions in the American Jobs Creation Act of 2004 that was approved by Congress on Oct. 11. President Bush is expected to sign the bill into law.
Under previous tax legislation, business owners were allowed to select for company use one of several light-truck models weighing more than 6,000 pounds fully loaded and write off most, if not all, of the costs on their tax returns. The law allowed for an immediate deduction of up to $100,000. Sharp-eyed business operators were quick to notice that most of today's sport utility vehicles met the weight limit. Soon, Hummers and Escalades replaced sedans as the business vehicle of choice.
Expense limit of $25,000
In the wake of mounting criticism, on both tax policy and environmental grounds, lawmakers have narrowed the SUV loophole. Now the $100,000 write-off applies only to vehicles weighing 14,000 pounds or more. This protects most business-use heavy trucks or vans, such as refrigerated trucks. If you drive something smaller for your business, as soon as President Bush signs this new bill into law you'll be able to expense only $25,000 of the amount it cost.
The other provisions of the tax break remain the same. The vehicle must be used for business, not personal, travel. 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.
"The difference in these expensing amounts may be insignificant to a large corporation, but could have a real impact on the bottom line of a small, struggling company," says Paul Gada, attorney and senior small business tax analyst for tax publisher CCH Inc., based in Riverwoods, Ill. "By making things more affordable from an after-tax perspective, it would also encourage small business to purchase equipment and improve their productivity."
"There may be a stampede to dealers of heavyweight SUVs, like the Hummer and the Cadillac Escalade," adds Gada. "But even with the new limit, a substantial portion of a new vehicle's cost can be written off through the combination of expensing and depreciation."
Road rage over rich rides
It didn't take long for the SUV tax break to find itself parked squarely in the middle of a storm of vehicular vitriol not heard since Japanese automakers came ashore with their fuel-efficient imports in the early '70s.
The original intent of the measure was to enable small farmers and other self-employed workers to buy a new truck or van without being dinged for the luxury car tax (which has since expired). At the time, it made perfect sense to exempt these heavier vehicles based on weight. After all, trucks and vans were far from status symbols, and early SUVs came nowhere near the three-ton loads they pack today.
The reconsideration of the law follows the change in America's driving habits. As super SUVs became the automotive status symbol of the new millennium, doctors, accountants and well-heeled professionals of every stripe helped themselves to the tax break originally designed to aid struggling family farmers.
"We definitely agree with continuing the tax break for small businesses that actually need it, but we don't think we should have law firms doing a latte run for the office in a massive SUV," says Aileen Roder, program director for Taxpayers for Common Sense, a Washington watchdog group. "Unfortunately, the market has outgrown the tax loophole. That loophole needs to be closed."
Although the government doesn't quantify the SUV tax break, TCS estimates the cost of the loophole to taxpayers at between $840 million to $987 million for every 100,000 vehicles sold for business use. Those figures would skyrocket if the cap were raised to $75,000.
Compare that to the in-kind cost of tax deductions to reimburse teachers for classroom supplies ($250 million), encourage investing in individual retirement accounts ($90 million) or help small businesses comply with the Americans with Disabilities Act ($525 million) and it's easy to understand why watchdog groups are crying foul over the extravagant, albeit legal, application of the statute.
In a white paper, TCS proposed reclassifying the heavy SUVs from industrial vehicles to passenger vehicles and placing them under the tax code's normal depreciation schedule for business.
"I have no problem with SUVs per se, but it's not a market that needs stimulating. They are flying off the lot," says Roder. "We don't need to be using the tax code to boost sales."
Rumblings of a bigger controversy
The tax break is a relatively minor point in a far hotter and broader debate over the moral and even spiritual ramifications of owning an SUV.
The gas-hungry luxury vehicles have recently come under attack by the Evangelical Environmental Network's "What Would Jesus Drive?" campaign and journalist Arianna Huffington's Detroit Project which links SUV driving to supporting terrorism. Even Dr. Jeffrey Runge, head of the National Highway Traffic Safety Administration, says SUVs are so unsafe that he wouldn't let his family ride in one "if they were the last vehicles on earth."
Ed Hunt, editor in chief of Tidepool.org, a news organization that tracks environmental issues, says buying an SUV for your business is at best penny-wise and pound-foolish.
"It's not really smart business," he says. "If I'm getting 15 miles to a gallon, that's twice as much money out the door as if I'm getting 30. Some of these vehicles get as low as 11 miles a gallon. If you're any kind of businessman, making a purchase that increases your monthly expenses just doesn't make any sense."
Hunt, who owns an SUV, says that the tax break is in direct contradiction to the Bush administration's goal of cutting U.S. dependence on foreign oil. He says we could have been off the stuff years ago if the government had provided similar tax incentives to switch to fuel-efficient vehicles. Even President Bush drives a natural gas Ford truck on his Texas ranch, he notes.
"Certainly the technologies are there, but there hasn't been the investment made in it that we make in subsidizing the oil and gas industries," he says. "President Bush's proposed $1.5 billion for hydrogen is approximately the advertising budget for the SUV in the United States on a yearly basis. It really is very, very little in terms of money."
Hunt says the time is right to shift the tax break from gas hogs to gas misers.
"We know the demand for oil is going to increase. The American Petroleum Institute says look, oil is going to get more expensive in the future and when it gets too expensive, people will switch to alternative power sources. It's not like this isn't conventional wisdom. But the sooner we start investing in that future, the more chance we will have to profit from it rather than have some other country make the investment and then sell us the technology later down the road. We would much rather be an exporter of clean energy technology than an importer."
Blame Jerry?
Chris Cedergren blames the whole convoluted SUV debate on Jerry Ford. That's right, former President Gerald Ford.
In 1975, Ford signed into law the Corporate Average Fuel Economy (CAFE) legislation. The legislation's good intentions aside, it made those same farm trucks exempt from new, tighter fuel-efficiency guidelines.
"That concept was great for the mid-'70s, but the federal government should have been watching trends, because what it did was push personal-use sales from cars to trucks," says Cedergren, an analyst for NexTrend, which works closely with the auto industry. "People still like big vehicles with big V-8 engines, and it was getting increasingly difficult to get them on the car side. CAFE gave a favorable bias toward trucks.
"If CAFE was never imposed or if it were equalized between car and truck, we wouldn't have the situation we have today."
Fashion, not taxes, lures boomers
Cedergren says the very idea of a tax incentive setting off a stampede of SUV buyers is just plain silly.
"The fact is, there is no impact whatsoever. People buy SUVs, especially the high-end ones, because of fashion. It's all about fashion, it's all about image. Their decision to buy an SUV over a Mercedes Benz passenger car is not driven by a tax incentive," says Cedergren.
"What mitigates the whole argument, too, is that so many people lease the vehicles that we're talking about. That tax incentive really goes away when you lease. It only affects the purchase."
The auto industry today is being driven by a higher percent of affluent buyers than ever before, according to Cedergren. Despite the prediction of some of the best minds on Wall Street, the children of the baby boom continue to purchase luxury vehicles at a record pace.
"The SUV consumer has been groomed under a high standard of living and basically expects to get whatever he wants whenever he wants it. It's hard to change behavior after it has been programmed into you for 25 or 30 years. Even if your stock portfolio goes down 40% or 50%, you're going to justify in any way you can to go out and continue spending because it's the only thing you know. You don't know how to sacrifice. You don't know how to do it."
Would it be safe to assume that the current uproar over SUVs doesn't overly concern industry insiders?
"We use it for comic relief," Cedergren says.
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