The federal tax law passed last year opened a loophole so big that a small-business owner could drive a Hummer through itor at least, drive one off a car lot much easier.
The law allowed a business to write off as a business expense up to $100,000 of the cost of any large passenger vehicle. That amount covers the entire cost of most such rigs. The break, which has become known as the SUV loophole, reduces a businesss taxable income.
The loophole tightened as soon as President George W. Bush signed this years tax bill, H.R . 4520, which includes language that reduces the deduction dramatically. Some Spokane-area car dealers say its been good for business while its lasted, and they marketed the deduction to potential buyers until the day it ended.
Its been a huge attraction, says George Gee, owner of George Gee Automotive, which carries Hummer, GMC, Pontiac, and Buick models. The smart, prudent businessperson is well aware of this.
Kent Berreth, managing member of the Spokane Valley accounting firm Berreth Lochmiller & Associates PLLC, says that under the law a business can write off as an expense in one year the entire depreciation of certain purchased equipmentincluding some furniture, computers, bulldozers, farm combines, among numerous other itemsthrough what the Internal Revenue Service refers to as Section 179 expensing.
Typically, depreciation is written off over a period of years, but through Section 179 expensing, a business in many instances can elect to take up to $100,000 in write-offs in the year equipment is purchased, Berreth says. In other words, he says, a business can accelerate the depreciation from a tax standpoint. The theory is that such tax benefits encourage businesses to invest in new equipment, which boosts economic activity, he says.
While Section 179 expensing has been available for years, the 2003 Jobs and Growth Tax Act increased the maximum amount that can be deducted under the rule to $100,000, up from the previous maximum of $25,000, and included as eligible purchases passenger vehicles with a gross vehicle weight exceeding 6,000 pounds.
Gus Johnson, owner of Gus Johnson Ford, says vehicles at that Spokane Valley lot with a gross vehicle weight of 6,000 pounds include Ford F-Series pickup trucks, Econoline vans, and Ford Excursion and Ford Expedition sport-utility vehicles. It doesnt include Ford Explorer sport-utility vehicles, Ford Ranger pickup trucks, or any smaller models.
The loophole has boosted heavy-duty truck sales in the Inland Northwest, Johnson says. He says trucks account for 70 percent of that dealerships new-vehicle sales, and about 80 percent of its truck sales are for heavy-duty models.
Johnson says the dealership marketed the tax law heavily toward the end of last year and in recent weeks geared up a similar advertising campaign.
This has been extremely successful for us, he says. We probably sold 25 percent more heavy-duty trucks than we normally would last December, and it was all due to people taking advantage of this.
Gee says his Liberty Lake dealership has spotlighted the tax benefit in a variety of media advertising, as well as in point-of-sales displays within its showroom.
New vehicles Gee carries for which the tax benefit fully applies include the GMC Denali and Yukon sport-utility vehicles, half-ton and larger GMC Sierra pickup trucks, and all Hummer models.
If its a business-use vehicle, and you can write off a $60,000 Hummer, thats huge, Gee says.
Berreth cites as an example the tax advantage that a business owner would have upon buying a $70,000 Hummer while the loophole was in effect. Assuming a 31 percent tax rate, which Berreth says is relatively common for a business, the buyer of the $70,000 vehicle could receive a $21,700 tax break in the year it purchased the vehicle, rather than spreading out the break over several years, as usually has been done.
He adds, Ive seen a lot of Hummers come through in this one year.
A business doesnt have to take advantage of the Section 179 expensing method, and instead can amortize the purchases depreciation over the course of five years, Berreth says.
Most passenger vehicles arent eligible for the entire accelerated depreciation. Under the 2003 law, the maximum annual write-off for most passenger vehicles is $10,160, Berreth says.
Under new law
This years tax bill, which is being dubbed the American Jobs Creation Act of 2004, leaves in place the $100,000 maximum annual depreciation for most types of business equipment, but reduces the maximum annual heavy-duty passenger-vehicle write-off to $25,000.
Berreth points out, however, that while the Section 179 expensing of such vehicles will, under the new law, be limited to $25,000, a new heavy-duty passenger vehicle also will be eligible for 50 percent bonus depreciation on the balance of the vehicles value, after the Section 179 expensing is deducted. Also, after both of those are deducted, a general years worth of depreciation could be deducted as well.
Heres an example of the maximum amount that could be deducted under the new law, according to Berreth.
If a company buys a 2005 Hummer for $70,000, it would be able to expense $52,000 of that in the first year. That includes the maximum $25,000 Section 179 expensing, $22,500 in bonus depreciation, and $4,500 in general annual depreciation. Assuming the same tax rate of 31 percent, the tax savings under the new rules still would be $16,120 in the first year, Berreth says.
Its not, then, a complete takeaway of the SUV deduction, just a limitation, he says.
The balance of the vehicles value then could be depreciated over the following four years in many cases, he says.
In both the new tax law and other tax legislation passed during the Bush administration, there are a number of limitations on Section 179 expensing, Berreth says. In general, he says, such stipulations are in place so that mostly small businesses are able to benefitand are encouraged to invest in new equipmentthrough accelerated depreciation.
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