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The Honolulu Advertiser
Posted on: Wednesday, January 22, 2003

SUV-buying incentive could triple under Bush plan

By Jeff Plungis
Detroit News

WASHINGTON — President Bush's economic stimulus plan could triple the size of a little-known tax loophole that some small-business owners are using to finance purchases of large SUVs.

One of Bush's proposed tax cuts would raise the amount small-business owners — including doctors, lawyers and financial advisers — can write off when buying an SUV for business purposes, from $25,000 to $75,000.

Several consumer groups and lawmakers have raised concerns about the fairness of the provision. The debate signals more trouble for a vehicle segment crucial to Detroit automakers, whose profits have been sustained by the SUV boom over the past decade.

How did tax policy become the latest clash in an escalating cultural war over SUVs?

The idea behind the broader tax benefit was that small businesses could help jump-start the U.S. economy if they spent more. To encourage entrepreneurs to open their wallets, Washington expanded the tax deduction for business equipment to $25,000 in 2003, from $17,500 in 1996. Bush's new plan takes the deduction limit up to $75,000.

"This is a plan that says that if you are willing to take risk and invest more, that there's a benefit for doing so," Bush said in unveiling the initiative Jan. 9. "It's an incentive for small business ... And it will have a positive effect throughout our entire economy."

Tax relief for small businesses has widespread bipartisan support on Capitol Hill. But critics are focusing on equipment write-offs used to finance luxury SUV purchases.

The Internal Revenue Service allows generous tax treatment for trucks, which the IRS defines as any vehicle with a gross weight of 6,000 pounds or more, regardless of whether it is used to haul goods or a single person.

The definition was originally intended to exempt farmers and other small businesses that needed a pickup or cargo van from limits that apply to luxury vehicles. But the definition was written well before a wide array of upscale trucks and SUVs hit the market — and well before U.S. consumers started using trucks and SUVs as a substitute for the family car.

The proposed $75,000 deduction on business equipment means that businesses choosing between a car and an SUV have an even bigger incentive to go for the SUV. Cars are not eligible for this deduction.

The Bush proposal comes on top of a stimulus bill passed last year in the wake of the Sept. 11, 2001, terrorist attacks that gave businesses an extra 30 percent accelerated depreciation on cars and trucks used as business equipment. Any remaining costs can be deducted on a regular depreciation scale of 20 percent in the first year of ownership.

Small-business owners have been using the $25,000 equipment deduction to help finance purchases of trucks and SUVs. With vehicles in the $47,000 price range, such as the Ford Excursion, more than $30,000 of the purchase price can be deducted, reducing a small-business tax bill by about $12,600.

Raising the cap on business equipment to $75,000 will make it possible to write off the entire cost of vehicles such as the Hummer H2 or BMW X5 in the first year. A small-business purchase of a car, by contrast, might take 10 years to 20 years to fully depreciate.

A business owner purchasing a Hummer H1 for business purposes could write off $25,000 of the purchase price as an equipment investment, for example. Under the provision passed in Congress last year to stimulate the economy, another 30 percent of the remaining purchase price, or $24,356, could also be deducted. The Hummer owner could then deduct 20 percent of the remaining purchase price, or $11,366, under regular depreciation rules. That's a total deduction of $60,722.

Under the Bush plan, the total deduction for a Hummer H1 will go up to a potential $88,722.

"Oh, you've got to be kidding," said Skip Barnett, a Hummer dealer in Atlanta. "That would make a Hummer practically free."

Barnett said most of his buyers were small-business owners with annual incomes of $200,000 or more. He said more and more of his customers were asking about the tax deduction.

Environmentalists and tax reformers want restrictions on how businesses can use the equipment tax break. They are confident they will find allies on Capitol Hill in their efforts to rein in what they describe as a perverse incentive to drive business owners into purchasing the largest, most gas-guzzling SUVs.