Time is running out for small-business owners who want a supersized tax write-off for buying a new SUV. Some businesses might mistakenly think that the savings withered in October...
SAN JOSE, Calif. Time is running out for small-business owners who want a supersized tax write-off for buying a new SUV.
Some businesses might mistakenly think that the savings withered in October, when Congress slashed a deduction for many sport-utility vehicles.
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But businesses still have until Dec. 31 to benefit from temporary “bonus” depreciation rules that were implemented after the Sept. 11 terrorist attacks to stimulate the purchase of computers, furniture and other equipment.
In some, a business still may write off $76,000 on a new $110,000 Hummer, deduct two-thirds of the cost of many SUVs or save an extra $7,000-plus on sedans.
That’s enough for some small businesses to erase their entire year’s profit, legally dodging both income tax and self-employment taxes.
If you’re in the market to buy a business vehicle soon, “do a double-think about whether you want to do it this year or next,” said Claudia Hill, owner of Tax Mam Tax Services Group in Cupertino, Calif.
Complex tax rules aren’t as big a draw as spiffy 2005 models, manufacturer incentives and low interest rates.
Hummer of Pleasanton, Calif., credits year-end tax planning with typically making December its biggest sales month. Ford Motor recently provided its dealers with a promotion to play up the tax advantages of buying an SUV.
“Most small companies in the area seem to be aware of it and are trying to take advantage of it if they can,” said Jeff Speno, general manager of Mission Valley Ford in San Jose, Calif. “We’re talking it up if they aren’t aware of it.”
Special depreciation rules for vehicles used mostly for business have long shaped buyer behavior.
Because companies can erase taxable profits dollar for dollar, many business owners gravitated to pricier cars because Uncle Sam was footing a chunk of the bill. When Congress limited the write-offs on “luxury” vehicles defined as anything costing more than a modest $14,800 in 2004 buyers steered toward SUVs.
Not just any SUV would do, however. The trick was to find one with a gross vehicle weight of more than 6,000 pounds. Those are considered trucks under the tax code and are eligible for so-called Section 179 depreciation that allows bigger write-offs in the year of the purchase, rather than dribbling out the deductions over a number of years.
In 2004, the Section 179 limit rose to $102,000. When packaged with “bonus” depreciation and regular depreciation, a business could deduct $106,800 of a $110,000 Hummer used exclusively for business, said Wayne Otchis, a certified public accountant in Del Mar, Calif. Multiply that by the top 28 percent federal tax bracket, and that works out to nearly a $30,000 subsidy.
Exasperated at how businesses were exploiting a law designed to subsidize work trucks, Congress changed the rules again in the American Jobs Creation Act. As of Oct. 23, vehicles generally must weigh more than 14,000 pounds to qualify for the $102,000 deduction.
Hummers and other SUVs weighing more than 6,000 pounds are limited to $25,000.
Still, that means businesses can deduct the first $25,000 of a qualifying SUV. And if they put the vehicle in service before the “bonus” depreciation expires at year’s end, they can tack on up to 50 percent of the remaining cost, plus what’s allowed under the standard depreciation rules.
As a result, a business can still deduct $76,000 of that $110,000 Hummer compared with $42,000 in 2005.
Similarly, there’s still a tax advantage to buying an SUV over a comparably priced car that falls under the luxury-car rules. For example, say you had $50,000 to spend on a vehicle you planned to use exclusively for business. The deduction for the Mercedes ML500 SUV would be $40,000, vs. $10,610 for the Mercedes E320 sedan, Otchis said. In 2005, the SUV’s deduction will fall to $30,000.
Don’t despair if you still prefer a sedan. With bonus depreciation, you can deduct as much as $10,610 in 2004. If you wait until 2005, the deduction will drop to about $3,000, Hill said. Inflation-adjusted figures for 2005 haven’t been announced yet, but the 2004 cap before the bonus depreciation is $2,960.
As tempting as these tax saving are, look before you leap. There are numerous pitfalls. For starters, taking a big write-off in 2004 could leave you with fewer deductions and higher tax bills in 2005 and beyond.
Erasing your business income also could pinch your deductions for mortgage interest and charitable deductions, limit the amount you can shelter in retirement accounts and endanger your eligibility for Social Security.
Lowering your business profits also could make it harder to qualify for bank loans.
And here’s another possible tax trap if you sell your vehicle or use it mostly for personal driving within five years. Hunks of your original deduction must be “recaptured” making it subject to both income and self-employment taxes.
This is especially risky for a self-employed consultant who accepts a full-time job and closes the business.
“Always use it if it’s appropriate for you,” said Hill, the owner of Tax Mam Tax Services Group. But remember, “When you’re running a business, you’re making decisions that will last more than two to three years. It needs to be a business decision, not to get a tax shelter.”