Today I ran across another example of how the government works against itself. Last week I highlighted the tax credits available for hybrid vehicles that meet the certification requirements and the leasing opportunities they present. These tax credits seem like a pretty good idea, and I think most of us can get behind a program that promotes fuel efficiency and reduces our dependence on fossil fuels. The government looking after our best interests, right?
Imagine my surprise, then, when I read that a recent Congressional Research Service (CRS) report says that the tax law still encourages businesses to buy heavy SUVs instead of comparable passenger cars. This is even after such purchases were restricted in the 2004 Jobs Act. As you are aware, §179 allows taxpayers to expense up to $108,000 (for 2006) of the cost of eligible personal property used in a trade or business. However, depreciation dollar caps apply to the combined allowable deduction under §179 and MACRS depreciation for passenger autos. For example, the maximum first-year combined expensing and depreciation deduction in 2006 is $2,960 for a car and $3,260 for a light truck or van.
Now, here is the kicker. Heavy SUVs – those with a GVW rating of more than 6,000 pounds – are exempt from the luxury auto dollar caps because they fall outside of the definition of a passenger auto in §280F(d)(5). Although the Jobs Act of 2004 imposed a limit on the expensing of heavy SUVs (under §179(b)(6), not more than $25,000 of the cost of a heavy SUV may be expensed), the balance of the SUV's cost may be depreciated under the regular MACRS rules that apply to 5-year property. These rules apply, with some exceptions, to SUVs rated at 14,000 pounds GVW or less.
The upshot, according to the CRS report, is that a business taxpayer can realize a greater reduction in the after-tax cost of a vehicle by buying a heavy SUV instead of a passenger car of comparable value. Since passenger cars are subject to the §280F annual limits, and heavy SUVs are not, the maximum expensing allowance for a heavy SUV is $25,000 in 2006. The maximum first-year depreciation allowance for a passenger auto in the same year, however, is restricted to only $2,960 ($3,260 for a light SUV of 6,000 pounds or less). To add insult to injury, the CRS report points out that the IRC also encourages the purchase of heavy SUVs by excluding them from the gas guzzler excise tax.
Hmmmm – let’s give tax credits for fuel efficiency and yet, at the same time, also provide incentives for gas guzzlers. Now, where is the logic in that? On the bright side, the CRS report notes that there are several bills in Congress to curtail these tax breaks for heavy SUVs.
Comment Preview