WASHINGTON, D.C. -- Taking the advice of her accountant, Carolyn Hodgson found a way to reduce her federal taxes this year: She spent $38,117 on a sport-utility vehicle.
After deducting the cost of the 2002 GMC Yukon Denali from her 2003 income, Hodgson figures she'll end up saving about $14,000.
"It helps offset some of the other rising expenses businesses are facing," said Hodgson, of Plymouth, who bought the SUV for her Edina delivery business.
The incentive, part of President Bush's economic stimulus package approved by Congress earlier this year, is gaining attention from car dealers and accountants across the country.
It encourages the use of the most fuel-inefficient means of transportation in urban America.
Minnesota Democrat Jim Oberstar
For years, business owners have been able to use vehicle purchases as tax write-offs for equipment, but now the rules have changed dramatically.
In a move intended to encourage businesses to invest in new equipment, Congress is allowing a full deduction of as much as $100,000 for business equipment. In previous years, the equipment deduction was limited to $25,000.
Included in the category of equipment are vehicles weighing more than 6,000 pounds when fully loaded -- which can mean heavy-duty pickups used in construction work or Cadillac Escalades.
For those who buy smaller vehicles, the tax benefit is much less attractive. The maximum deduction businesses can take this year for a new car weighing less than 6,000 pounds is $10,710. And while the deduction for large vehicles can be taken in a single year, the deduction for smaller cars must be spread out over five years.
In New York, RIA senior tax analyst Bob Trinz is urging people who run small businesses or professional practices to "buy yourself an SUV for Christmas." And in the Twin Cities, car dealers are realizing that the break could be good for business.
"We're going to take advantage of this and go after it in the next 60 days," said Michael Kahn, sales manager at Stillwater Motors.
Kahn said the tax break has meant a bigger demand for trucks, vans and SUVs. For example, instead of stocking two or three Chevy Express cargo vans, Kahn has 15. And he's trying to get the word out because he says it will help his business and the economy.
The tax law is encouraging a bigger-is-better mentality among both auto dealers and the buying public.
To qualify, vehicles must be used mainly for business. At least 38 vehicles hit the 6,000-pound weight requirement, including Dodge Durangos, Lincoln Navigators and Toyota Land Cruisers. Buick introduced a new luxury SUV for 2004 that barely meets the cutoff: 6,001 pounds fully loaded. A buyer who has more than $50,000 to spend could shop for a Range Rover or a Hummer H2.
"We've seen a change in the type of vehicles that some people are buying," said Cheryl Meyer, an accountant with Biebl and Ranweiler in New Ulm, Minn. The firm's tax advisers have been talking about the tax breaks at state and national conferences for accountants.
Some dealers are expecting an end-of-the-year rush because small-business owners who buy and use qualifying vehicles before Dec. 31 can deduct the entire amount from their taxable income this year.
So far, Kahn said, funeral homes, construction companies, real estate agents and delivery services are among those taking advantage of the tax break.
"People come in and want to upgrade their whole fleet, so they're coming in with big orders," he said.
Tom Johnson, a Minneapolis tax adviser for Boulay, Heutmaker and Zibell, said he hasn't seen people buy vehicles that they don't need or can't afford.
"It's still an economic decision," he said. "But if they need a vehicle like that, it makes it much more attractive."
Even with the tax break, consumers have to think about how much they'll spend on gas. The larger SUVs generally get between 9 and 15 miles per gallon.
Hodgson said she already discovered the drawback.
"This thing is horrible," she said of her Denali, adding that she's at the gas pump every three days. "I step on the gas and you can just watch the gas gauge drop."
Environmentalists and fiscal watchdogs are fuming.
They say that not only is Congress failing to increase fuel-efficiency standards, but now Washington is allowing tax breaks that encourage bigger vehicles.
"Just by increasing the fuel efficiency of our cars and trucks, we could answer a major part of the challenge of America's energy future," said Sen. Richard Durbin, D-Ill.
"As long as SUVs are flying off of dealership lots, the current break makes no fiscal sense," said Keith Ashdown, vice president of policy for Taxpayers for Common Sense.
Rep. Betty McCollum, D-Minn., and 26 other House Democrats are cosponsoring a bill that would plug the SUV loophole. A similar bill has been introduced in the Senate by Barbara Boxer, D-Calif.
"Giving tax breaks to encourage the selling of these heavy, gas-inefficient SUVs . . . doesn't do anything to help us reduce our dependency on oil," McCollum said.
Minnesota Democrat Jim Oberstar, the ranking member of the House Transportation and Infrastructure Committee, said the tax break is "bad policy," adding: "It encourages the use of the most fuel-inefficient means of transportation in urban America."
While the legislation to plug the SUV loophole is pending, nothing is scheduled to change anytime soon. When Congress considered an energy bill earlier this month, efforts to change the deduction back to $25,000 failed. Under current law, the $100,000 deduction will end on Dec. 31, 2005, returning to the $25,000 level.
For now, business groups argue that the increased deduction is helping businesses expand, even if it means more people are buying SUVs.
"In the big picture, you're stimulating the economy by giving small business owners a bigger deduction," said Raj Nisankarao, president of the National Business Association.
He said that people often forget that the new $100,000 limit is allowing businesses to purchase more equipment and supplies than the $25,000 limit permitted.
But McCollum said the need for an SUV tax break has never come up in conversation with a small-business owner.
Though Hodgson said she appreciates the tax break, she wonders whether the money could be spent elsewhere.
"It just seems like this is helping the people who are already successful," she said.
© Copyright 2003 Star Tribune