There's another reason why Sport Utility Vehicles ("SUVs") are so popular. A loophole in the federal tax code allows people who use their vehicles for business (i.e., greater than 50%) to write off the cost of a truck, van or oversized car much more quickly than a typical passenger sedan.

Vehicles with a loaded gross vehicle weight of more than 6,000 pounds are not considered passenger autos in the tax code. Instead, these vehicles fall under the rules that apply to vehicles like trucks and vans.

Loaded gross vehicle weight should not be confused with curb weight. Many vehicles that are given a loaded gross vehicle weight of more than 6,000 pounds would be under that figure if you were only considering their curb weight. However, the tax code specifies loaded gross vehicle weight.

If you buy a new car in 2001 and use it exclusively for business, the most you can claim as a depreciation deduction is $3,060. For that car, the rules allow you to take a depreciation deduction of no more than $4,900 in 2002, $2,950 in 2003 and $1,775 for each year thereafter. (Note, there are more liberal rules for electric or "clean-fuel" cars.) In addition, the tax code forbids car owners from using tax code Section 179, which allows for the immediate expensing (as opposed to depreciating the asset over 2 or more years) of $24,000 worth of business equipment each year.

Suppose you purchase a $44,000 Lexus sedan that will be used exclusively for business. At the allowed maximum depreciation rates, it would take more than 20 years before the car was fully depreciated. Granted, you can also deduct the actual costs of ownership (gas, repairs, maintenance, etc.).

Now suppose you purchase a $44,000 Mercedes ML 430, as pictured above. This vehicle weighs 6,283 pounds, according to CarPoint. As such, $24,000 can be written off as a Section 179 expense. The remaining $20,000 can be depreciated over six years, including $4,000 in the first year. Total deduction allowed in the first year (not including gas, repairs and maintenance): $28,000.

For someone paying federal taxes at a rate of 35%, the difference in the tax treatment of the two types of vehicles can mean a tax savings of more than $8,000 in the first year of ownership.

There are some other issues to consider. If the vehicle is sold for an amount greater than the adjusted basis (i.e., cost less depreciation), then you will have to pay tax when you sell ("depreciation recapture"). In addition, regardless of deductions, SUVs tend to be more expensive than your average vehicle to buy, insure and maintain.

© Excerpted from an article by Joseph Anthony for Microsoft bCentral

 

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