On Oct. 22, 2004, President Bush signed intolaw the American Jobs Creation Act of 2004,which moved to substantially limit the taxdeduction available to small businesses thatpurchase large SUVs for business use. In fact, the battlebetween Congress and taxpayers to restrict the amountthat small businesses deduct for their automobiles has along history. So if you need to transport equipment aspart of your practice or if your spouse has a small businessin need of an SUV, you may want to explore the historyand the current status of this savings opportunity.
In 1984, Congress acted to limit the aggressive taxdeductions that businesses were taking for the purchaseof company passenger automobiles by placing severerestrictions on the amount of depreciation that businessescould deduct. However, in an effort to preserve thistax benefit of automobile purchases for farmers, whooften had a necessity for expensive, heavy-duty vehicles,Congress carved out these restrictions to apply only tovehicles that weighed less than 6000 pounds.
But as increasingly large vehicles have come intocommon use over the past 20 years, the so-called "lighttruck"exception for farmers unwittingly includes SUVsthat weigh-in at an excess of 6000 pounds.
New Tax Law
The opportunity for any number of businesses tobegin buying large SUVs and claim the less restrictivedepreciation rules applicable to light trucks wasimproved even further with the passage of the JobsGrowth and Tax Relief Reconciliation Act of 2003,which created the opportunity to expense up to$100,000 per year of tangible property purchases forsmall businesses (there is a phase out limitation).
Suddenly, wealthy small business owners began purchasinglarge SUVs, and took advantage of the exceeding-6000-pounds exception to expense the entire purchaseprice as a tax deduction under the $100,000 peryear total limit. However, this tax deduction can only betaken to the extent that the business has income to offset;the SUV tax deduction cannot create a business loss.
Congress's passage of the American Jobs CreationAct of 2004 reduced this tax opportunity, but did noteliminate it. As the tax law stands, small businesses maystill expense up to $25,000 of the purchase price of anSUV as a part of the so-called "Section 179 expensing"rules and apply depreciation to the remainder of thevehicle cost. However, several notable restrictions to thistax opportunity should be kept in mind.
First, if the vehicle isn't driven entirely for businessuse, then only a portion of the vehicle's price may beincluded in the tax calculations. For example, if you onlyuse the vehicle for business use 80% of the time, thenonly 80% of the purchase price is available for deductionby expensing or depreciation.
In addition, if the vehicle isn't used predominantlyfor business use (at least 50% of the time), then it is noteligible for the deductions at all. If business use of thevehicle is more than 50%, it is critical not to let thatbusiness use drop to less than 50% within the 5-yeardepreciation period of the vehicle, or the expense deductionsare recaptured as income. You can discuss withyour accountant which portions of your particularSUV/automobile usage will constitute business use.Although the expense tax deduction for SUVs is subjectto a $25,000 limit, amounts that haven't been expensedare still eligible for depreciation of 20% in the first year.
Enjoy, with Caution
How good does it get? Let's look at an example. If aLand Rover Range Rover was purchased for approximately$70,000, the business would be eligible toexpense the first $25,000 of the cost, and depreciate anadditional $9000, for a total of $34,000 of tax deductionsin the first year. For an individual business ownerin a 30% tax bracket, this produces approximately$10,200 of tax savings, with additional depreciationavailable in subsequent years.
In the end, it's important to beware of the pitfalls ofthe SUV tax deduction. And it's critical to ask the dealerwhether the vehicle will qualify as being in excess of6000 pounds for the tax break to apply. But if you arecareful, substantial tax benefits are available, even withthe new restrictions Congress has put in place.
Michael E. Kitces
is director of financial planning
for Pinnacle Advisory Group, Inc (www.pinnacleadvisory.com), a private wealth management firm
located in Columbia, Md. He welcomes questions
or comments at firstname.lastname@example.org.