Congressional Research Service Report, Apr. 4, 2006
A recent Congressional Research Service Report says that despite restrictive provisions in the 2004 Jobs Act, the tax law still encourages business taxpayer to buy heavy sport utility vehicles (SUVs) instead of comparable passenger cars.
Background. Taxpayers generally may elect under Code Sec. 179 to expense up to $108,000 (for 2006) of the cost of eligible personal property used in the active conduct of a trade or business. However, depreciation dollar caps apply to the combined allowable deduction under Code Sec. 179 and MACRS depreciation for “passenger autos.” (Code Sec. 280F(a)(1); Code Sec. 280F(d)(1)) Thus, the maximum first-year combined expensing and depreciation deduction is $2,960 for an auto bought and placed in service in 2006 and $3,260 for a light truck or van (a passenger auto built on a truck chassis, including a minivan and sport-utility vehicle (SUV) built on a truck chassis) that is rated at 6,000 pounds (loaded) gross vehicle weight (GVW) or less (see Federal Taxes Weekly Alert 03/23/2006).
Heavy SUVs—those with a GVW rating of more than 6,000 pounds—are exempt from the luxury auto dollar caps because they fall outside of the definition of a passenger auto in Code Sec. 280F(d)(5). To deal with this “SUV tax loophole,” the American Jobs Creation Act of 2004 (the Jobs Act, PL 108-357, 10/22/2004) imposed a limit on the expensing of heavy SUVs. Under Code Sec. 179(b)(6), not more than $25,000 of the cost of a heavy SUV placed in service after Oct. 22, 2004 and used 100% for business may be expensed under Code Sec. 179. The balance of the heavy SUV's cost may be depreciated under the regular rules that apply to 5-year MACRS property (e.g., a 20% first-year depreciation allowance if the half-year convention applies for the placed in service year). These rules apply, with some exceptions, to SUVs rated at 14,000 pounds GVW or less.
Code Sec. 4064 imposes an excise tax (known as the “gas guzzler tax”) on domestic sales by manufacturers or importers of new autos that don't meet statutory standards for fuel economy, i.e., autos with relatively poor fuel economy ratings. The tax ranges from $1,000 for autos with a fuel economy rating of at least 21.5 miles per gallon but less than 22.5 miles per gallon to $7,700 for autos rated at less than 12.5 miles per gallon. There is no tax on autos with a rating of at least 22.5 miles per gallon. To be subject to the gas-guzzler tax, the auto must be rated at 6,000 pounds unloaded GVW or less. (Code Sec. 4064(b))
SUVs still get premium tax break. The CRS report, “Tax Preferences for Sport Utility Vehicles (SUVs): Current Law and Legislative Initiatives in the 109th Congress,” updated Apr. 4, 2006, says that a business taxpayer can realize a greater reduction in the after-tax cost of a vehicle by buying a heavy SUV instead of a passenger car of comparable value. Passenger cars are subject to the Code Sec. 280F annual limits. On the other hand, heavy SUVs are not. So while a heavy SUV is now restricted to a maximum expensing allowance of $25,000 in 2006, the maximum first-year depreciation allowance for a passenger auto in the same year is even more restricted to only $2,960 ($3,260 for a light SUV of 6,000 pounds or less).
The CRS report says that the Code also encourages the purchase of heavy SUVs by excluding them from the gas guzzler excise tax.
RIA observation: Since many SUVs get relatively poor gas mileage, it is conceivable that retail prices could be as much as $2,000 to $7,700 higher for many models if the law were changed so that heavy SUVs were subject to the tax and manufacturers and dealers passed the full amount of the tax on to buyers.
The CRS report notes that several bills in Congress would curtail the tax preference for heavy SUVs under the current depreciation rules by either subjecting all heavy SUVs to the annual Code Sec. 280F limits or by providing incentives for more fuel efficient SUVs.
RIA Research References: For the limits on heavy SUVs, see FTC 2d/FIN ¶ L-9907.2; United States Tax Reporter ¶ 1794.015; TaxDesk ¶ 268,411.1; TG ¶ 14232.
Source: Federal Taxes Weekly Alert (preview) 04/20/2006, Volume 52, No.
