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The SUV deduction was originally created for farmers, but became a way for self-employed business owners to write off luxury SUV purchases as business expenses. The IRS has since closed the loophole, limiting the deduction to $25,000 for vehicles used for business purposes over 50% of the time. Environmental groups argue that this tax break encourages the purchase of large vehicles and should be replaced with a reward for small or hybrid vehicles.
The sport utility vehicle (SUV) deduction was established in the mid-20th century to help farmers who used the vehicles for business purposes. When the luxury SUV hit the market, this deduction became a way for self-employed business owners to write off their large vehicle purchases as business expenses. The SUV deduction was changed in 2004 to make it slightly less beneficial for those looking to purchase large vehicles for non-agricultural purposes.
When the SUV deduction loophole was first discovered, small business owners were able to write off almost their entire luxury SUV purchase over the course of five years. At that time, any business owner who purchased a vehicle over 6,000 lbs. (2,721 kg) could write off up to $100,000 USD (USD) of the purchase. The code that was initially meant only for farmers to buy vehicles for transportation was being used to get high-income people to write off gas-guzzling luxury SUVs.
By 2004, the IRS had caught on to the loophole and began to close it, although many would argue that it is still wide open. The maximum limit of $100,000 USD has been adjusted to $25,000 USD and the vehicle must be driven for business more than 50% of the time. The SUV deduction is claimed in section 179 Business Expenses for those filing a Schedule C as a business or corporation. The vehicle must be a four-wheeled vehicle intended to carry passengers weighing between 6,000 and 14,000 lbs (2,721 and 6,350 kg).
The SUV deduction should be taken as a percentage of commercial driving. For example, if $20,000 USD was the amount paid for the vehicle in one year, and it was used 70% of the time for business, the 179 deduction would be $14,000 USD. Any time business use falls below 50%, the vehicle can no longer be claimed as a business expense.
The $25,000 USD deduction must be taken in the first year of purchase, but depreciation expenses can be taken over five years. For example, an SUV is used 100% for business purposes and the original cost was $40,000 USD. In the first year, $25,000 can be written off between depreciation and initial expense. Over the next 4 years, the remaining $15,000 can be written off as a depreciation expense. If the vehicle is not used for at least 50% of the business purposes in the first year of purchase, it cannot be claimed at all.
This loophole, combined with the fact that SUVs are not subject to the 5% luxury tax on high-priced vehicles, makes them an attractive prospect for many business owners. Environmental groups argue that this tax break encourages the purchase of large vehicles which in turn creates excess emissions and use of fossil fuels. Many who oppose the SUV deduction believe it should be replaced with a reward for the purchase of small or hybrid vehicles.
Smart Asset.
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