In hopes of encouraging more business spending to help jump-start the economy, President Bush's new Economic Stimulus Plan would triple the equipment deduction currently available to small business owners (from $25,000 to $75,000) -- enough to make some of the largest, most luxurious SUVs fully deductible.
Back in 1996, in an effort to change tax laws "to encourage business investment," Congress made it possible for business owners to claim $17,500 in accelerated depreciation on equipment (such as trucks). That amount increased in '01, '02, and '03 from $20,000 to $24,000 to $25,000, respectively. Now, Bush's plan calls for up to $75,000 "accelerated depreciation" for business owners.
According to Bush in his January 9 unveiling of the initiative: "This is a plan that says that if you are willing to take risk and invest more, that there's a benefit for doing so. It's an incentive for small business to increase... And it will have a positive effect throughout our entire economy."
The tax break was originally intended for business owners such as farmers and construction workers, so their pickup trucks and cargo vans would not be treated as "luxury vehicles" - for which the code was not as generous. At the time, nobody considered SUVs and pickup trucks as "luxury" vehicles. But the tax code defines industrial vehicles by weight instead of function, and the parameter that the vehicle must be over 6,000 pounds fits the original intent of the legislation to help small family farmers. Due to the fact that SUVs are today classified as "light trucks," SUV owners who are also business owners can now take advantage of such benefits.
With their recent rise in popularity, accountants have been advising more and more of their clients to take advantage of this loophole in the law. The tax break applies specifically to small business owners including doctors, lawyers, financial advisers, real estate agents, and independent contractors who buy a truck or SUV for business purposes. Thus, the deduction is legal whether the vehicle is used to haul seven construction workers, 3,000 pounds of plumbing tools, or one certified public accountant. The main requirement is that the buyer uses their SUV more than 50% of the time in their business.
So, for example, last year a business owner could deduct $25,000 outright off the cost of a new SUV. Under Bush's economic stimulus package (which became law last year) the purchaser got an extra 30% bonus deduction off the balance of the sticker price. Subtract another 20% a year in depreciation over five years, and business owners who purchased SUVs already got a hefty tax write-off. Now, Bush wants to increase the small business deduction from $25,000 to $75,000.
In fact, raising the cap on business equipment to $75,000 will make it possible to write off the entire cost of most SUVs (including the Hummer H2 - MSRP $49,270 and BMW X5 - MSRP $40,195) in the first year. Others, like the Hummer H1 will be practically free to the business owner. Here's how:
According to the Detroit News (http://www.detnews.com/2003/autosinsider/0301/20/a01-64218.htm), a business owner who purchases a Hummer H1 (MSRP $106,185) for business purposes could write off $25,000 of the purchase price as an equipment investment. Another 30% of the remaining purchase price (or $24,356) could also be deducted under a provision passed in Congress last year to stimulate the economy. The Hummer owner could then deduct 20% of the remaining purchase price (or $11,366) under regular depreciation rules. That's a total deduction of $60,722. Under the Bush plan, the total deduction for a Hummer H1 would go up to a potential $88,722.
With all the tax breaks and loopholes, some vehicles would in effect, be free. Who knew the day would come when you could buy a new Chevy Suburban for about the cost of a two-door Saturn?