Duane T. Blakeslee CPA - Certified Public Accountant - Pflugerville, TX Accounting, IT & Management Consulting, & Financial Services

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Dear Client:

We have received several inquires about the so-called SUV tax loophole regarding the depreciation of SUVs and other heavy vehicles used in a business. The SUV loophole is actually the interaction of two tax provisions as described below. Under this “loophole,” certain limitations on the amount that can be deducted in the year a vehicle is placed in service do not apply to automobiles rated at more than 6,000 pounds of unloaded gross vehicle weight or vans and trucks rated at more than 6,000 pounds of gross vehicle weight.

Generally, the cost of business equipment is a capital expenditure, however, you can elect to treat a portion of the cost, subject to yearly limits, as an expense in the year the equipment is placed in service. This is referred to as the “Section 179 expense,” and it applies to certain types of property—including vehicles—used in a business. There are limitations on the amount that can be expensed under Section 179, including a yearly set-dollar limit of $100,000 in 2003 and $102,000 in 2004. The limit is indexed for inflation so the amount for 2005 has not yet been determined; in 2006, the set-dollar limit is scheduled to return to its pre-2003 level of $25,000. Two things are noteworthy: (1) this yearly set-dollar limit is the aggregate dollar amount of all Section 179 property that can be expensed, i.e., this limits the amount that can be expensed for all Section 179 property, such as furniture, fixtures, equipment, and vehicles; and (2) the set-dollar limit is reduced, i.e., you cannot deduct the full $100,000 or $102,000, respectively, if the aggregate cost of Section 179 property placed in service in that year exceeds $400,000 in 2003 or $410,000 in 2004. (This limit is indexed for inflation so the amount for 2005 has not yet been determined; in 2006, this limit is scheduled to return to its pre-2003 level of $200,000.)

For passenger automobiles rated at 6,000 pounds or less of unloaded gross vehicle weight and vans and trucks (including minivans and SUVs that are built on a truck chassis) rated at 6,000 pounds or less of gross vehicle weight, the amount of the first-year deduction otherwise allowed under Section 179 plus other depreciation deductions is subject to a stricter dollar limitation imposed under Section 280F:

If a passenger automobile rated at 6,000 pounds or less of unloaded gross vehicle weight, other than a van or truck (or an electric passenger vehicle or vehicle retrofitted to run on clean-burning fuel), is placed in service in 2004, the Section 179 expense deduction plus any depreciation deduction cannot be more than $2,960 for the first tax year (the placed-in-service year), $4,800 for the second tax year, $2,850 for the third tax year, or $1,675 for any year thereafter. If the automobile qualifies for additional first year “bonus” depreciation, the first-year limit is increased by $7,650 to $10,610.

If a van or truck rated at 6,000 pounds or less of gross vehicle weight (including minivans and SUVs that are built on a truck chassis) is placed in service in 2004, the Section 179 expense deduction plus any depreciation deduction cannot be more than $3,260 for the first tax year (the placed-in-service year), $5,300 for the second tax year, $3,150 for the third tax year, and $1,875 for any year thereafter. If the van or truck qualifies for additional first year “bonus” depreciation, the first-year limit is increased by $7,650 to $10,910.

Vehicles rated at higher than the weights set out above are not subject to the lower Section 280F limitation. Instead, these vehicles are subject to the Section 179 set-dollar limit of $100,000 in 2003 and $102,000 in 2004. This is the so-called SUV loophole and, if all the qualifications are met, it allows taxpayers to deduct the cost of a heavy vehicle used in a business.

I hope this helps explain how Sections 179 and 280F work together. There are a few additional things that you should note:

· There are other rules under Section 179 that affect whether the expense can be deducted, including a limitation based on the taxable income of your business.

· The Section 179 and depreciation deductions allowed for vehicles are reduced if the vehicle is not used exclusively for business.

Legislation—such as the Jumpstart Our Business Strength Act (S. 1637, H.R. 4520) and the Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2004 (H.R. 3550)—has been proposed to curtail the “SUV loophole.”

If you have any further questions, please do not hesitate to contact us.

SUV Loophole

Date: 12/29/2004