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Business jump on suv loophole { November 7 2003 }

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Businesses Jump on an SUV Loophole
Suddenly $100,000 Tax Deduction Proves a Marketing Bonanza

By Jonathan Weisman
Washington Post Staff Writer
Friday, November 7, 2003; Page A01

When Congress this year decided to allow small-business owners, doctors, lawyers and real estate salespeople to deduct up to $100,000 from their taxable income for the purchase of a luxury SUV, Texas car-dealership magnate Jerry Reynolds could hardly believe his good fortune.

He took to the radio to spread the news, drafted a treatise for the Internet, and last week, the man known around Dallas simply as "the car guy" began advertising in the Dallas Morning News. "It's a loophole," the ad proclaims, "and this weekend, we can show you how to make that loophole big enough to drive a fleet of trucks and sport utility vehicles through it!"

The "SUV loophole" once seemed to be just a quirk in the tax code -- deplored by environmental activists but ignored by most everyone else. Now it is shaping up to be a marketing bonanza for financial planners, accountants and auto dealers eager to snap up commissions and drive up sales of heavy vehicles, ranging from workhorse Ford F-250 pickup trucks to elite Hummer H2s, BMW X5s and Mercedes-Benz ML55s.

"It's really been an eye-opener for people," Reynolds said. "And it's been fun, I've got to tell you."

A similar tax break, in fact, is longstanding, although more limited. Since 1997, anyone deemed to be a small-business owner for tax purposes could write off some amount of equipment purchases each year -- up to $18,000 worth that first year, up to $25,000 in 2003. Since 1984, the Internal Revenue Service, thinking more about Chevy Silverado pickups than Cadillac Escalades, has considered vehicles that weigh more than 6,000 pounds to be deductible business equipment.

When lawmakers began writing this year's $350 billion tax-cut plan, they looked for ways to help the economy by encouraging small businesses to invest in new equipment, which could include computers, rotary saws or photocopiers. Congress raised the maximum annual value of the deduction to $100,000, through 2005. At the time, environmentalists implored tax writers to disqualify SUVs, but lawmakers declined. With the top business tax rate at 35 percent, Washington effectively cut $18,900 from the price of a $54,000 Escalade, bringing its cost more in line with an Oldsmobile Aurora sedan.

The windfall is starting to get notice.

"Buy Yourself an SUV for Christmas," encourages RIA, a New York-based tax information firm.

"Bigger Depreciation/Expensing Deductions for Autos, Trucks, SUVs and Vans," advises a newsletter from Dallas accountant Barry N. Finkelstein.

"Write-Off 100% of Your New SUV? Yes," blares a flier from Dugan & Lopatka, an accounting firm in the Chicago suburb of Wheaton, Ill.

After the Auto Spies Web site picked up the Dugan & Lopatka flier, the firm was so deluged with phone calls that its switchboard nearly had to shut down, said Dave Massoth, a Dugan & Lopatka accountant.

Land Rover, the British-made vehicle better known for its cachet among affluent carpoolers than its utility in the work world, has been mailing out glossy brochures advising customers to "accelerate" both on the gas pedal and on their tax depreciation tables.

The tax break hasn't yet made a noticeable difference in sales of large trucks and SUVs, which have become increasingly popular anyway, said Haig Stoddard, industry analysis manager for Ward's Auto World.

But, he noted, "if there was going to be an increase, I think it would happen more in November and December," when tax-conscious buyers would be rushing to claim the deduction on their 2003 tax returns. "That time of year also is when those kinds of vehicles have their highest penetration in the market anyway, because of their four-wheel-drive application," he said.

A true surge in sales may not be necessary to have an impact. Manufacturers make more money on a big truck or SUV than on other vehicles, said George Peterson, president of AutoPacific Inc., an auto industry consultant in California. An SUV with a sticker price of $50,000 might yield a profit of $20,000 or more. A minivan's profit would be a tenth that amount. "So even if [the tax break] sells a few hundred more units or 1,000 more units, that's all money that goes to the bottom line," he said.

To get the full write-off, the vehicle is supposed to be used full time for business purposes. As long as it is used more than half the time for business purposes, its owner can deduct some of its purchase price -- say, 75 percent for a Chevy Suburban used 75 percent of the time for business.

"For the rest of us mere mortals, it's just something else to be annoyed at," said Ric Edelman, chairman of Edelman Financial Services in Fairfax.

But heck, who's counting? Reynolds said the biggest boost in sales for his Ford, Lincoln, Mercury, Mazda and Chrysler-Jeep dealerships has come from real estate salespeople who do a lot of driving with a lot of big signs.

"You've got to assume a Realtor is going to use that thing all day long, but at night it's the nicest vehicle they've got, and they're probably going to use it then, too," he said. "It's probably like anything in taxes. There are probably some amount of cheaters."

The tax change's power stems from two concurrent forces: the size of the write-off, $100,000, and the metastasizing of passenger cars into behemoths. Six thousand pounds once seemed like a reasonable demarcation between passenger vehicle and business necessity. But now, three-ton luxury cars are becoming commonplace, and they do not have to be the obvious leviathans, such as five-ton Hummers and 8,600-pound Suburbans. Chevy Trailblazers, Lincoln Aviators, Land Rover Discoveries and trendy Volkswagen Touaregs just meet the limit.

So many new models are just over 6,000 pounds that Reynolds suspects that automakers have their eyes on the tax code. A 2003 two-wheel-drive Dodge Durango weighs 6,050 pounds.

"It's not really a loophole per se," Massoth said. "It's just that a lot of these vehicles are getting to the size where they no longer qualify as passenger vehicles under the Internal Revenue Code."

When the equipment write-off was limited to $25,000, it was not very attractive to car buyers, said Bob Trinz, a senior tax analyst at RIA. A radiologist could easily purchase that much X-ray equipment in a year, using up the allotted tax break.

But now, Trinz said, there's plenty of room left for that $65,000 Porsche Cayenne. "The tax breaks have never been more compelling than they are this year," Trinz said.

Or as Reynolds noted in his advertisement, with a new 2003 Ford F-150 XL Supercab flareside truck with automatic, air and more going for $18,499, "You could buy five and deduct the entire amount from your 2003 income taxes!"

The Senate Finance Committee voted to plug the loophole in a little-noticed provision in a broader corporate tax bill that it approved last month. By raising the weight limit to 14,000 pounds, enough to disqualify even the gargantuan Hummer H1, the committee figured it would save the Treasury nearly $1.3 billion over 10 years. But that bill is far from passing the full Senate, and the House Ways and Means Committee has not considered a comparable measure.

For now, the Finance Committee effort has only added a new, compelling wrinkle to the loophole marketing.

Warning of "a move afoot in Congress," Trinz advises in an RIA press release: "Now may be the time to act if you're interested in the convenience, versatility and tax breaks that heavy SUVs offer."

Staff writer Greg Schneider contributed to this report.

2003 The Washington Post Company

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