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Crackdown on SUV Expensing in the American Jobs Creation Act of 2004

You may have heard that you can write off up to $100,000 of the cost of a luxury sport utility vehicle (SUV). Until recently, this was true. Small-business owners and the self employed were allowed to expense as much as $100,000 (actually $102,000 for 2004, due to inflation adjustments) of the purchase price of heavy SUVs (those with a gross, or loaded, vehicle weight of over 6,000 pounds and built on a truck chassis). This created a huge incentive for anyone running their own business to buy heavy SUVs, thereby contributing to their popularity. The bad news, at least from a tax perspective, is that the recently passed American Jobs Creation Act of 2004 has narrowed the so-called SUV loophole by rolling back the expense deduction to $25,000 for most purchases. And, unlike many tax changes which take effect at some time in the future, this change took effect for SUVs placed in service after Oct. 22, 2004 (the date the President signed the American Jobs Act into law), presumably to prevent people from rushing out to buy heavy SUVs before the tax break disappeared.

The good news, though, is that heavy SUVs are still treated favorably under the tax laws. The rules that limit the amount of annual depreciation that can be deducted on passenger automobiles do not apply to heavy SUVs (those with a gross, or loaded, vehicle weight of over 6,000 pounds and built on a truck chassis). Thus, heavy SUVs are eligible for regular depreciation allowances (and bonus first year depreciation for 2004), on top of the $25,000 that is allowed to be expensed. Here's what I mean. Say that you bought a heavy SUV that costs $80,000 on Oct. 31, 2004, and used it 100% for business driving. Assuming the SUV would qualify for the expensing election, you would be allowed a $25,000 deduction on your 2004 tax return. In addition, you would be allowed an additional first-year depreciation deduction of $27,500 based on 50% of $55,000 ($80,000 original cost less the expense deduction of $25,000) of adjusted basis. Finally, the remaining adjusted basis of $27,500 ($55,000 adjusted basis less $27,500 additional first-year depreciation) would be eligible for a depreciation deduction of $5,500 under the general depreciation rules. To sum it all up, you would be able to write off a total of $58,000 of the $80,000 purchase price on your 2004 tax return. The remaining $22,000 ($80,000 original cost less $58,000 deductible currently) would be recovered in future years under the general depreciation rules.

However, because additional first-year depreciation is not available after 2004, the results are not as good if you buy that $80,000 heavy SUV in 2005. On your tax return for the 2005 year, you'll still be able to expense $25,000. But your first-year depreciation deduction will be limited to $11,000 (($80,000 minus $25,000) x 20%). That will yield you a total first-year writeoff of $36,000. The remaining $44,000 will be recovered in 2006 and later under the general depreciation rules. This assumes you use the vehicle 100% for business.


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