SUV tax write-offs

August 4, 2004 3:32 PM

I never understood how the "SUV as a business write-off" thing works. Can any tax-savvy folks explain to me how this saves you taxes or gets you a virtually free car? More >>

I've read the article, the Slate article today that mentioned it, and this list of vehicles you can buy to qualify. But I still don't get how this works to someone's advantage, I mean you're still having to pay for a $60k car right?

If someone was a sole proprietor, bought one of these new vehicles and claimed it and their home office for their business, then claimed 100% vehicle use for the new car, they'd get to write the whole purchase price off. I get that part.

What I don't get is where the money goes. Say the business owner made $100k in a year, and owes say $30k in tax. Say the heavy SUV cost $60k, and is completely deductible.

Does that person get a refund for $30k? Or is the benefit merely that instead of the money going to the IRS it goes into a new car?

Whenever I read a story about this loophole, it sounds like greedy business owners are getting free Hummers thanks to the $100k writeoff, but I guess I don't see where the free money comes from, since you still have to actually break down and buy a really expensive vehicle. What am I missing here?

posted by mathowie to law & government (10 answers total)

My understanding (and IANACPA) is that some SUVs are so _heavy_ that they fall under a law written for heavy work trucks/tractors because of their actual tonnage.

Because these are _financed_, my understanding is that you get to write off the _interest_ you pay on the loan... $5,000 written off the first year can really make a nice dent in the tax burden... that is if you're soul can take the umbrage of actually driving the damn thing.

: )

Again, IANACPA.
posted by silusGROK at 3:51 PM on August 4, 2004

You don't get a free SUV, you get to deduct the price of your SUV from your earnings/income all at once in your first year of owning it, which reduces your taxes by (marginal.tax.rate)(price). So your SUV only net costs you (1-marginal.tax.rate)(price).

The idea seems to be not so much "Hey! Free SUV!" but that buying a $100000 Hummer or Cayenne is cheaper than buying an $80000 Mercedes, which shifts buying towards the SUV's and away from luxury cars.
posted by ROU_Xenophobe at 4:16 PM on August 4, 2004

If I my company only made a buck profit for the whole year; could I write off $60K. Don't think so.
posted by thomcatspike at 4:19 PM on August 4, 2004

It reduces your tax burden, but doesn't "earn" you any money past that. So in your example, a person with a $30k tax burden can write off his $60k SUV, but since his burden was only $30k, that's all the relief he's going to get.

When a local Mexican restaurant started their restaurant business, they also bought an early model H2. In that initial year, I assume they had massive startup costs... building acquisitions, food service equipment, fixtures, advertising, etc. The H2-writeoff probably wouldn't benefit the sole proprietor, but in the case of these restaurateurs, the writeoff played a significant role in reducing their tax burden. In addition, they plastered their name all over the vehicle, which helped spur interest since people weren't too familiar with the H2 yet.

The downside with this type of strategy is that it is a one-time writeoff. So in the case of the restaurateurs, it helped them reduce their enormous startup costs. But for an established business, it would probably be wiser to depreciate the vehicle over several years and spread the relief out a bit.

Maybe a better way to address your question: The way I think of writeoffs is a way to get more for my money. If I owe, say, $6k in taxes, should I just pay the government that $6k? Or would I rather own a new G5/30" display for that $6k? Either way, I'm going to have to spend $6k -- but I'd rather spend that $6k the way *I* want to rather than simply stroke a check to the government.

(obligatory: I could be terribly wrong in my understandings. I pay an accountant for this very reason.)
posted by Hankins at 4:48 PM on August 4, 2004

To take your example, assume a person is not eligible for the deduction. He earns $100,000 and pays 35% for income tax. That leaves a net of $65,000. He buys the SUV for $60,000 and now has a new SUV and $5,000 left.

Now take the case of the self-employed person using the deduction. He earns $100,000, buys the SUV for $60,000 and gets a deduction from his income so that his net income is only $40,000. He's now in the 27% bracket and pays 27% of $40,000 as taxes leaving him a net of $29,200. So he has a new SUV and $29,200 cash. The deduction reduced both the income being taxed and the tax rate. Essentially the government is paying for 27% of the SUV using money he would otherwise pay in taxes.

In the real world, the benefit is actually better, because a self-employed person also pays 15% in social security and medicare taxes. His tax rate is more like 50%. So he gets his SUV for about half price. The feds pay for the other half in foregone tax revenues.

To answer thomcatspike, if you don't make a profit this year, you can carry the deduction forward to any year in which you make a profit and use the deduction then.
posted by JackFlash at 4:51 PM on August 4, 2004

Actually I should clarify that. The self-employed person has an extra $24,200 in his pocket because of the deduction. This is 40% of the cost of the SUV, not 27%. This consists of 35% of the $60,000 plus the benefit of the lower tax bracket for his remaining income.
posted by JackFlash at 6:06 PM on August 4, 2004

An older Land Rover may be the way to go. I see early '90s range rovers and dicos for $10k and under all the time in SoCal.
posted by Kwantsar at 6:31 PM on August 4, 2004

Ugh. You don't want an early 90's Disco or RR because they were shoddily built and always had things go wrong with them.
posted by gen at 12:49 AM on August 5, 2004

> The way I think of writeoffs is a way to get more for my money.

The basic point it, if you have any reason to want an suv (to brass-plate your balls or even, gasp, to use it for legitimate business, delivering 700 pizzas to the VFW picnic on the North Slope) your business can buy it with untaxed money this way. If you have no reason to want an SUV it's not a good deal no matter how much you save (using this dodge doesn't earn you any money.)
posted by jfuller at 5:06 AM on August 5, 2004

However, one dodge is that you can keep the vehicle for a year, sell it (hopefully breaking even), then rinse and repeat. If I was a small business owner, I'd think about it if I had need of a vehicle.
posted by Irontom at 10:09 AM on August 5, 2004