Light Trucks’ Big Break

Under A Tax Code Change, Business Owners Might Be Able to Write Off That Hummer

October, 2003

With price tags starting at $116,483 for the Hummer H1 and $54,770 for the Cadillac Escalade, a farmer certainly wouldn’t rush out and buy either one. However, that could change, since the limit on deductions for business equipment under the Section 179 of the federal tax code was raised to $100,000 in May. Purchasing a big, expensive luxury sports utility vehicle could be a dream come true for farmers and other businessowners.

The SUV credit under Section 179 was originally intended to help farmers and businessowners who need trucks or vans for work purposes. The tax code defines industrial vehicles by weight instead of function. All vehicles that weigh over 6,000 pounds fall under the “light truck” category and qualify for the deduction.

There are 38 different luxury SUVs, including the GMC Yukon, the Cadillac Escalade and the Hummer H1, all of which weigh more than 6,000 pounds and therefore are classified as “light trucks.” The $100,000 limit on deductions enables buyers to write off the entire cost of a qualifying SUV. The price of a $40,195 BMW X5 is fully deductible.

The main requirement for this hefty deduction is that buyers use their SUVs for business purposes more than 50 percent of the time, and prove that it is primarily a business asset by documenting its function as a piece of business equipment.

Since the popularity of the tax break began to increase in January, accountants started to catch on and encouraged their clients to take advantage of the opportunity. The tax break applies specifically to small-business owners-including doctors, independent contractors, and lawyers-who buy a light truck or SUV for business purposes. Thus, the deduction is legal, whether the vehicle is used to haul 1,000 pounds of tools, seven construction workers or one accountant.

This loophole, of course, is benefiting not only buyers, but the car dealers as well. Hummer sales, along with other big SUVs, such as the Cadillac Escalade and GMC Yukon, have been increasing rapidly, according to Bob Sargis, sales consultant at Schuman Carriage. A study published in Hawaii Auto Outlook and distributed by the Hawaii Automobile Dealers Association is forecasting a whopping 312.5 percent increase in Hummer sales for 2003 from the 16 registered in Hawaii in 2002. According to David Rolf, HADA executive director, the increase in Hummer sales could be driven by either the tax break or the vehicle’s new look.

Registrations of vehicles in the “light truck” category increased from 21,267 in 2001 to 24,216 in 2002, with a forecast of 31,028 in 2003. Sargis encourages his clients to take advantage of the opportunity while it lasts. “It is a major point in sales for us,” Sargis says.

The loophole has upped Lincoln Navigator sales this year, according to Jackson Auto Group General Manager Russ Wong. As of August, Jackson Auto Group had already sold 80 percent of the number of Navigators that were sold in 2002. “I’m very pleased to see that this tax code is helping stimulate the economy and also supporting car sales,” says Wong.

Although the SUV tax credit is making headline news on the U.S. mainland, it’s not as well known in Hawaii. Auto dealers such as Cutter Chevrolet and Ford Honolulu haven’t heard too much about the tax credit and haven’t been encouraging their small-business clients to jump at the opportunity.

Doreen Griffith, senior tax manager at Grant Thornton in Honolulu, which specializes in small businesses, says that the tax code change is still relatively new. Only a few people in Hawaii know it exists. Griffith encourages her clients to go after this opportunity, not because of the hefty deduction, but because it would really benefit their businesses to have a vehicle for work. “Don’t let the tax impact be the sole driver,” Griffith says.

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Author:

Huy Vo