Sport utility vehicles (SUVs) have been enjoying record sales, even as gasoline prices climb and the vehicles themselves are scorned as being pro-terrorist and models of choice for Satan. One out of every four automobiles sold in 2002 was an SUV.
Some time ago, Newsweek magazine featured a four-page story about the remarkable popularity of SUVs. The article was seasoned with pop psycho-jargon about the "consumer culture of overindulgence," the "conflicted psyches of baby boom consumers" and how Americans like SUVs "because they appeal to their 'reptilian brain.'"
Hogwash. There's another reason why SUVs and other oversized vehicles are so popular, at least with people who use their cars for business: These living rooms on wheels appeal to their Tax Brain.
The magic number is 6,000
I first reported this to you back in 2001, but let me explain again. A loophole in the tax code lets you write off the cost of a truck, van or just plain oversized car much more quickly than you're allowed with the typical 3,000-pound passenger sedan. The faster write-off effectively reduces the cost to a business of owning one of these so-called "utility" vehicles. (By the way, how often do you actually see an SUV used primarily for its off-road capabilities?)
In short, the tax code subsidizes all those big-shouldered SUVs that are being used to make deliveries, to show prospective home buyers through neighborhoods and to take clients out to tax-deductible lunch meetings.
The key number for making this happen is 6,000 as in pounds. SUVs with a gross vehicle weight of more than 6,000 pounds aren't even considered passenger autos in the eyes of the tax code. Instead, they fall under the kinds of rules that apply to other large vehicles such as trucks and vans.
Buy a car, deduct the 50% bonus plus $3,060
If you buy a new luxury car for $40,000 in 2003 and use it exclusively for business, you can take a special deduction of 50% of the purchase price, up to a price of $15,300, plus a depreciation deduction of up to $3,060. (The so-called "50% bonus depreciation" was part of the tax-cut plan passed by Congress in May 2003.) You could depreciate the car in future years as well. (Note: There are more-liberal rules for electric or "clean-fuel" cars.)
Under current law (as of early 2003), it will take about a decade before the car is fully depreciated. You also can deduct the actual costs of ownership (gasoline, repairs, maintenance, etc.), but it'll be a long time before you get to write off everything you paid for the car.
But buy an SUV and deduct $100,000 or more
Now, instead, let's look at the Chevy Suburban SUV. This little baby weighs in at more than 6,000 pounds, according to MSN Autos. Thus, it is not considered, for tax purposes, to be a passenger automobile.
The difference is huge. The limits on write-offs for autos do not apply to this "non-auto." Pay $40,000 and use the SUV, and you are eligible to take the entire cost as a Section 179 deduction in 2003. If for some reason you found a vehicle costing more than $100,000 that you could justify using for business, you could still depreciate the additional amount in future years. Rolls Royce, anyone?
For someone paying combined state and federal taxes at a rate of 35%, the difference in the tax treatment of the two types of vehicles can mean a tax savings of more than $10,000 in the first year of ownership. That outweighs just about any other financial consideration for some taxpayers. "With that kind of deduction," the owner of a Lincoln Navigator tells me, "I wouldn't care if the thing got five miles a gallon."
Tax breaks aren't (quite) everything
SUVs aren't total slam-dunks from a tax perspective. They're not eligible for these special benefits if not used more than 50% for business. They're like any other business equipment in that you could find yourself having to pay a tax when you sell the vehicle on some of the depreciation you've previously claimed. And, regardless of deductions, SUVs tend to be more expensive than your average auto to buy, insure and maintain.
Is it fair that you get more favorable business-car deduction rules if you drive a literally heavyweight vehicle? Of course, not.
Add this to the list of all the other things about the tax code that aren't fair or don't seem to serve any useful social purpose. I'm not going to side with the people who've done those provocative "Your SUV supports terrorism" ads. But it would be nice if our tax policies in this area meshed with our concerns about reducing dependence on international oil supplies.