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669
THE SUV TAX LOOPHOLE: TODAY’S QUINTESSENTIAL
SUBURBAN PASSENGER VEHICLE BECOMES SMALL
BUSINESSES’ QUINTESSENTIAL TAX BREAK
by
Carrie M. Dupic
*
Concededly, whether any given tax provision of the Internal Revenue
Code (“the Code”) is a “loophole” or an “opportunity” is a matter of
perspective. Of late, section 280F(d)(5) of the Code has been both criti-
cized and praised for the dual tax-evading and tax-saving qualities it
possesses. Known as the “SUV tax loophole,” this Code section is the
mechanism that sets the wheels of tax incentives turning, producing great
tax write-offs for those small businesses and self-employed individuals
who buy heavy sport utility vehicles for business use. This Comment ex-
plains the development of the SUV tax loophole, and demonstrates, by
way of illustrative hypotheticals, its persuasive influence on small busi-
nesses’ vehicle choices. Also discussed are legislators’ failed attempts to
“close” the loophole at both the state and federal levels. Finally, this
Comment argues for and suggests ways for Congress to close the SUV
tax loophole at its source in section 280F(d)(5).
I. INTRODUCTION.....................................................................................670
II. THE SUV TAX LOOPHOLE PERSUADES SMALL BUSINESSES
TO BUY HEAVY SUVS: AN ILLUSTRATIVE HYPOTHETICAL......673
A. Scenario 1: Purchasing a Luxury Sedan for Business Use................673
B. Scenario 2: Purchasing a Sport Utility Vehicle for Business Use.....676
III. SECTION 280F AND THE UNINTENDED SUV TAX LOOPHOLE....677
A. The Original Purpose of Section 280F..............................................678
B. The Advent of the SUV as a Trendy Luxury Vehicle Opens Up the
SUV Tax Loophole.............................................................................679
C. The Fuss About SUVs: Environmental Concerns..............................680
1. Scenario 1: Choosing Between a Heavy SUV and a Com-
paratively Priced Hybrid Passenger Automobile........................682
2. Scenario 2: Choosing Between a Heavy SUV and the Most
Expensive Hybrid Passenger Automobile on the Market ............682
*
J.D. 2005, Lewis & Clark Law School; B.S.B.A., summa cum laude, 2002, Washington
University in St. Louis. The author thanks Professor Jack Bogdanski for his comments and
assistance with this Comment. She also extends special thanks to her family and friends for
their endless encouragement, prayers, and support. Additionally, she thanks Neah Huynh for
his love, patience, and understanding through it all. Finally, the author lifts up thanksgiving
to God, for His manifold blessings.
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670 LEWIS & CLARK LAW REVIEW [Vol. 9:3
3. Scenario 3: Choosing Between a Heavy SUV and the Most
Fuel-Efficient Hybrid Passenger Automobile on the Market ......683
IV. THE SUV TAX LOOPHOLE AT THE STATE LEVEL .........................683
A. State Response to the Federal Tax Incentives That Widen the
SUV Tax Loophole.............................................................................683
1. State Conformity with the Federal Tax Incentives ......................684
2. State Decoupling from the Federal Tax Incentives .....................686
B. Legislative Effort to Close the SUV Tax Loophole at the State
Level ..................................................................................................687
1. Maryland.....................................................................................688
2. California....................................................................................689
3. Oregon ........................................................................................691
V. MISSED OPPORTUNITIES: CONGRESS’S FAILURE TO CLOSE
THE SUV TAX LOOPHOLE IN SECTION 280F...................................694
A. Congress Has Failed to Close the SUV Tax Loophole Directly at
Its Source...........................................................................................694
B. Changes to Business Tax Incentives Narrow, But Do Not Elimi-
nate, the SUV Tax Loophole..............................................................695
C. Roger Revisited: A Hypothetical That Shows the SUV Tax Loop-
hole Still Exists, and It Still Persuade Small Businesses to Buy
Heavy SUVs.......................................................................................696
1. Scenario 1: Purchasing a New Business Vehicle in 2004 Af-
ter the Enactment of the Jobs Act................................................696
2. Purchasing a New Business Vehicle in 2005 ..............................697
D. Recommendations for Congressional Action.....................................697
VI. CONCLUSION .........................................................................................698
I. INTRODUCTION
The law regarding business tax incentives is continually changing. What
remains constant is the Sport Utility Vehicle (“SUV”) tax loophole in section
280F(d)(5) of the Internal Revenue Code (“the Code”). Generally, section 280F
operates to restrict the total amount businesses may write off each year as ex-
pensing and depreciation deductions for “passenger automobiles” purchased for
business use. The definition of “passenger automobile” focuses on vehicle
weight; therefore, certain behemoth SUVs fall outside the definition of passen-
ger automobile and are not subject to the section 280F deduction limitations.
This means that a business that purchases a heavy SUV instead of a lighter pas-
senger automobile (such as a sedan) enjoys larger deductions and consequently
greater tax savings in the year of the vehicle’s purchase. Knowledge of the
SUV tax loophole has become widespread, and it is now common practice for
small business entities and self-employed individuals to buy heavy SUVs just
for the tax breaks.
Of course, one tax critic’s “loophole” is another taxpayer’s “opportunity.”
What opens the SUV tax loophole to criticism is the way it interacts with sec-
tion 179 expensing and section 168 depreciation deductions. These two busi-
ness deductions have undergone several changes in recent years as Congress
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 671
has endeavored to stimulate the economy by encouraging business growth.
Congress has designed these deductions to act as valuable tax incentives—in
the form of bigger write-offs against gross income—to purchase new business
assets, such as vehicles. So transformed, the expensing and depreciation deduc-
tions interact with section 280F to widen the SUV tax loophole and showcase
its power to persuade a small business or self-employed individual
1
to choose a
super-sized SUV over any other vehicle on the lot.
More specifically, Congress has enacted three tax acts in recent years to
amend section 179 expensing and section 168 depreciation in ways that have
resulted in the widening of the SUV tax loophole. The Job Creation and
Worker Assistance Act of 2002
2
(“JCWAA”), enacted March 9, 2002, added
subsection (k) to section 168 of the Code, providing for 30 percent bonus de-
preciation for certain depreciable property in addition to the regular deprecia-
tion deductions otherwise allowable under section 168. Then the Jobs and
Growth Tax Relief Reconciliation Act of 2003
3
(JGTRRA), enacted May 28,
2003, extended the acquisition dates for property qualifying for bonus deprecia-
tion, and increased bonus depreciation to 50 percent. In addition, JGTRRA
amended section 179 to increase the expensing amount from $25,000 to
$100,000, and to increase the phase-out threshold from $200,000 to $400,000.
Most recently, the American Jobs Creation Act of 2004,
4
enacted October 22,
2004, extended JGTRRA’s increased expensing two more years, and added
paragraph (6) to section 179(b) of the Code to limit SUV expensing to $25,000.
Finally, bonus depreciation expired on January 1, 2005. Clearly, the law of
business tax deductions is ever-changing, as Congress continues to manipulate
deductions’ operation as tax incentives for business investment and growth. But
as the hypotheticals in this Comment will show, the expensing and depreciation
deductions continue to interact with section 280F to widen the SUV tax loop-
hole. Consequently, accountants and tax professionals across the country have
the same tidbit of tax-saving advice for their small business clients: buy an
SUV.
5
Of course, the advice is not merely to buy an SUV, but to buy a super-
1
The SUV tax loophole primarily benefits small businesses and self-employed indi-
viduals because they typically do not buy enough section 179 equipment in a given year to
phase out their section 179 expensing deduction. Small and large businesses are put on the
same playing field, however, when the expensing deduction is assumed to be used up,
phased out, or waived, so that both entities may enjoy bonus depreciation and otherwise al-
lowable regular depreciation.
2
Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147, 116 Stat. 21
[hereinafter JCWAA].
3
Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. No. 108-27, 117
Stat. 752 [hereinafter JGTRRA].
4
American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 [hereinaf-
ter “the Jobs Act”].
5
Jeffrey Ball & Karen Lundegaard, Tax Breaks for the Merely Affluent: Quirk in Law
Lets Some SUV Drivers Take Big Deduction, W
ALL ST. J., Dec. 19, 2002, at D1 (Says one
tax professional: “If a client is looking at purchasing a Navigator vs. another luxury vehicle
for the same amount, [our accounting firm] would make sure [the client] understand[s] [she
gets] a deduction quicker on the heavier vehicle.” As far as a client’s vehicle preferences go,
“[a]lthough the deduction rarely persuades a luxury-car buyer to buy a truck instead, it some-
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672 LEWIS & CLARK LAW REVIEW [Vol. 9:3
sized SUV in excess of 6,000 pounds gross vehicle weight, since this is the
only way to reap the benefits of the SUV tax loophole.
The existence of the SUV tax loophole in section 280F runs contrary to the
original purpose of that section: to crack down on abusive deduction practices
by businesses buying expensive luxury vehicles just to enjoy bigger tax write-
offs. In addition, with the environmental concerns inherent to the SUV, this tax
incentive to choose a heavy SUV over other types of vehicles contradicts other
provisions of the Code designed to reward businesses for buying more envi-
ronmentally friendly vehicles such as electric cars. Finally, allowing businesses
bigger first-year write-offs for SUV purchases costs both the federal and state
governments millions of dollars in lost tax revenue each year. In fact, legisla-
tors in a few states in the throes of budget crises have pushed (unsuccessfully)
for closure of the SUV tax loophole at the state level.
The SUV tax loophole is a loophole that developed by accident, as a prod-
uct of changing consumer preferences for luxury vehicles. Congress needs to
close the loophole in section 280F in order to restore the original purpose of
that Code section, to be consistent with other Code provisions that reward more
environmentally friendly vehicle purchases, and to alleviate budget crises by
putting more tax revenues into federal and state coffers.
Part II will illustrate, by way of a two-part hypothetical, the SUV tax loop-
hole and its power to persuade a self-employed individual to buy a heavy SUV
instead of a sedan for business use. Part III explores the development of the
SUV tax loophole, explaining the original purpose of section 280F and the
changes in consumer preferences that revealed the loophole’s value as a tax in-
centive. This part also discusses common environmental criticisms of SUVs,
and compares the provision that rewards businesses for buying electric passen-
ger automobiles to the SUV tax loophole. Part IV discusses responses at the
state level to the federal tax incentives (increased expensing and bonus depre-
ciation) and the SUV tax loophole. Finally, Part V exposes Congress’s missed
opportunities to close the SUV tax loophole directly at its source, the section
280F passenger automobile definition, and shows that Congress’s remedies for
the loophole thus far are quite inadequate.
times persuades people to pick a big SUV instead of a smaller one.”). See also UNION OF
CONCERNED SCIENTISTS, TAX INCENTIVES: SUV LOOPHOLE WIDENS, CLEAN VEHICLE
CREDITS FACE UNCERTAIN FUTURE, at http://www.ucsusa.org/clean_vehicles/cars_and_suvs/
page.cfm?pageID=1280 (last visited Apr. 18, 2005) (noting that accountants and online tax
management sites encourage small business owners to buy SUVs with advertisements such
as “Write-Off 100% of Your New SUV? Yes, If It’s Under $100,000!”); S
ELF EMPLOYED
WEB, at http://www.selfemployedweb.com (last visited Apr. 13, 2005) (an online resource
for small business owners and self-employed individuals, featuring links such as “SUV Tax
Deduction” (links the reader to informative articles) and “SUV Tax Deduction List” (informs
the reader which vehicles qualify for the generous first-year deductions)).
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II. THE SUV TAX LOOPHOLE PERSUADES SMALL BUSINESSES TO BUY
HEAVY SUVS: AN ILLUSTRATIVE HYPOTHETICAL
Meet Roger, a self-employed, independent Realtor who is willing to spend
up to $50,000 on a new vehicle to use exclusively for his business. He wants a
luxury vehicle to impress his clients when he drives them around to view
homes and properties, and to give himself a professional appearance when he
travels during work hours to meet other Realtors at open houses, closings, and
other Realtor functions. For the purposes of this hypothetical, Roger will pur-
chase the vehicle on September 1, 2004 (a date prior to the enactment of Jobs
Act), Roger will put the vehicle in service in the same year, and the 2004 in-
come associated with Roger’s realty business is $150,000. Also, Roger is a tax-
payer who wants to maximize his 2004 expensing and depreciation deductions
because he prefers to defer as much tax as possible.
6
This hypothetical will ap-
ply the law as it existed prior to the enactment of the Jobs Act. Each scenario
will consider increased section 179 expensing under JGTRRA, section 168(k)
50 percent bonus depreciation under JGTRRA, and regular MACRS double-
declining balance method depreciation to determine and compare the maximum
amounts Roger may deduct in the year of purchase for a luxury sedan and a
heavy, luxury SUV. This will show that the SUV tax loophole creates a strong
incentive for Roger to choose a heavy SUV.
A. Scenario 1: Purchasing a Luxury Sedan for Business Use
Roger is interested in purchasing a new 2005 Mercedes E320 sedan, a
classic luxury car that fits into his budget at a price of $50,000. The sedan
qualifies as “section 179 property,”
7
and because Roger plans to purchase it on
a date that falls between the years 2002 and 2006,
8
the property is eligible for
the increased section 179 expensing deduction. For 2004, small businesses and
self-employed individuals are allowed to deduct up to $102,000 on the aggre-
6
Of course, if Roger is currently not in the highest income bracket, but anticipates that
his profits will greatly increase next year, pushing him into a higher bracket, then he may
prefer to plan the timing of his deductions more carefully so that he may enjoy greater tax
savings when taxed at a higher rate.
7
“Section 179 property” is, generally, depreciable tangible personal property that is
acquired by purchase for use in the active conduct of a trade or business. I.R.C. § 179(d)(1)
(RIA 2005). The sedan qualifies for section 179 expensing because automobiles are 5-year
depreciable tangible personal property under I.R.C. § 168(e)(3)(B) (RIA 2004), and Roger
plans to purchase this automobile for exclusive use in the conduct of his realty business.
8
JGTRRA increased the dollar limitation for section 179 expensing from $25,000 to
$100,000, but only for taxable years beginning after 2002 and before 2008. I.R.C. §
179(b)(1) (RIA 2005) (as amended by JGTRRA, supra note 3, at § 202(a)(1)). JGTRRA also
increased the phase-out threshold from $200,000 to $400,000 for taxable years 2003, 2004,
and 2005. I.R.C. § 179(b)(2) (RIA 2005) (as amended by JGTRRA, supra note 3, at §
202(b)). On October 22, 2004, the Jobs Act extended JGTRRA’s increased expensing two
years through the end of 2007. The Jobs Act, supra note 4. Assuming these increases are
permitted to sunset as scheduled, on January 1, 2008, the dollar limitation will revert back to
$25,000, and the phase-out threshold will revert back to $200,000.
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674 LEWIS & CLARK LAW REVIEW [Vol. 9:3
gate cost of qualifying property.
9
It seems that Roger will be able to expense
the full $50,000 cost of the new sedan, because the sedan is the only section
179 qualifying property purchased in 2004, meaning that the total amount spent
on section 179 property falls well below the $410,000 phase-out threshold,
10
and his business income for the year exceeds the expensing deduction.
11
How-
ever, Roger cannot expense the full $50,000 cost in 2004 because the Mercedes
E320 is a “passenger automobile,”
12
subject to section 280F limitations on de-
ductions for luxury automobiles.
13
The maximum amount Roger may expense
in the year of purchase is $10,610,
14
and because the expensing deduction
would use up the amount section 280F allows him to claim as deductions for
the passenger automobile in the first year, he is not allowed to take a deprecia-
tion deduction for 2004. Thus, taking a section 179 expensing deduction of
$10,610 would leave him with an adjusted basis of $39,390
15
to depreciate over
subsequent years using the MACRS double-declining balance method.
9
The $100,000 annual expensing limit, as well as the $400,000 phase-out threshold,
are to be indexed for inflation for the taxable years 2004 and 2007. I.R.C. § 179(b)(5)(A)
(RIA 2005) (as amended by JGTRRA, supra note 3, at § 202(d)). Indexed for inflation, the
2004 dollar limitation was $102,000.
10
Indexed for inflation, the 2004 phase-out threshold is $410,000. The $102,000 ex-
pensing limit is reduced dollar for dollar by the amount by which the total cost of section
179 property exceeds $410,000. I.R.C. § 179(b)(2). Thus, by the time total purchases of
qualifying property reach $512,000 for the taxable year, the expensing limit is completely
phased out, and no section 179 expensing deduction is allowed for that taxable year. In ef-
fect, this means that only small businesses may take advantage of immediate expensing un-
der section 179.
11
After the potential section 179 deduction amount is determined by applying section
179(b)(1)−(2), the deduction is also subject to a limitation based on the taxpayer’s business
income: the deduction amount for the taxable year cannot exceed the aggregate amount of
taxable income derived from the taxpayer’s trade or business in the same taxable year. I.R.C.
§ 179(b)(3)(A) (RIA 2005). Any deduction amount in excess of the taxpayer’s business in-
come, however, is allowed to carryover to future taxable years. I.R.C. § 179(b)(3)(B) (RIA
2005).
12
A “passenger automobile” is any four-wheeled vehicle which is manufactured pri-
marily for use on public streets, roads, and highways, and weighs 6,000 pounds or less.
I.R.C. § 280F(d)(5) (RIA 2005). The Mercedes E320 sedan is such a vehicle.
13
I.R.C. § 280F(a)(1)(A) (RIA 2005) imposes limits on the amount that may be de-
ducted as depreciation for passenger automobiles purchased for business use in each taxable
year of the property’s recovery period. This limitation applies to section 179 expensing de-
ductions as well, “in the same manner as if it were a depreciation deduction allowable under
section 168.” I.R.C. § 280F(d)(1) (RIA 2005) (emphasis added). Thus, section 280F acts as
one limitation on both kinds of deductions (expensing and depreciation) that may be taken
on the cost of a passenger automobile.
14
For passenger automobiles that qualify for the 50% bonus depreciation under section
168, the depreciation dollar limit for the first taxable year of the automobile’s recovery pe-
riod is increased by $7,650, from $2,560 to $10,210. I.R.C. § 168(k)(4)(D) (RIA 2004) (in-
creasing the limitation amount under I.R.C. § 280F(a)(1)(A)(i) (RIA 2005)). Indexed for
inflation, the cap on first-year depreciation deductions for passenger automobiles that qualify
for bonus depreciation becomes $10,610. Rev. Proc. 04-20, 2004-1 C.B. 642. The $10,610
cap also applies to section 179 expensing deductions taken in the year of purchase for pas-
senger automobiles. See I.R.C. § 280F(d)(1).
15
$50,000 – 10,610 = $39,390.
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2005] THE SUV TAX LOOPHOLE 675
This scenario will now assume that section 179 does not apply because
Roger elected not to take an expensing deduction,
16
leaving Roger to see how
much deduction he can get applying bonus depreciation
17
and regular MACRS
depreciation rules. The sedan is eligible for 50 percent bonus depreciation be-
cause it is “qualified property”
18
that Roger plans to purchase on a date that
falls after May 5, 2003 and before 2005.
19
Electing the 50 percent bonus depre-
ciation would yield a first-year deduction of $25,000,
20
leaving Roger with an
adjusted basis in the sedan of $25,000.
21
Additionally, his otherwise allowable
depreciation deduction would be $5,000,
22
leaving Roger with a new adjusted
basis of $20,000
23
to depreciate over the rest of the vehicle’s five-year recovery
period. Thus, Roger’s total potential first-year depreciation deduction is
$30,000.
24
Unfortunately, Roger cannot deduct the full $30,000 as depreciation
in 2004, because section 280F applies to limit his deduction to $10,610.
25
Thus, whether Roger chooses to claim a section 179 expensing deduction
or depreciation deductions in the first year, section 280F acts to cut his deduc-
tion amount to $10,610 each time. Still, claiming a deduction of $10,610
saves
26
him $3,713.50 in tax dollars for this taxable year,
27
$2,677.50 more
16
Section 179 expensing deductions are optional. I.R.C. § 179(a) (RIA 2005).
17
Bonus depreciation was allowed to expire at the end of 2004. It still applies in this
hypothetical, however, because the hypothetical assumes the purchase occurred in Septem-
ber 2004, when JGTRRA 50% bonus depreciation was still in existence.
18
The sedan is “qualified property” because it is five-year depreciable property under
I.R.C. § 168(e)(3)(B) (RIA 2004). I.R.C. § 168(k)(2)(A)(i)(I) (RIA 2004); Temp. Treas. Reg.
§ 1.168(k)-1T (RIA 2004).
19
In 2002, JCWAA added subsection (k) to section 168. Job Creation and Worker As-
sistance Act of 2002, Pub. L. No. 107-147, 116 Stat. 21, § 101(a). The new subsection al-
lows for 30% bonus depreciation for the first taxable year in which the qualified property is
placed in service, I.R.C. § 168(k)(1)(A) (RIA 2004), in addition to the depreciation deduc-
tion otherwise allowable for that taxable year, I.R.C. § 168(k)(1)(B) (RIA 2004), as long as
the property is acquired by the taxpayer after September 10, 2001, and before September 11,
2004, I.R.C. § 168(k)(2)(A)(iii) (RIA 2004), and placed in service by the end of 2004. I.R.C.
§ 168(k)(2)(A)(iv) (RIA 2004). In 2003, JGTRRA amended section 168 to extend the acqui-
sition period for 30% bonus depreciation through the end of 2004, and allow for new 50%
bonus depreciation for qualified property purchased after May 5, 2003 and before 2005.
I.R.C. § 168(k)(4)(B) (RIA 2004).
20
$50,000(.50) = $25,000.
21
$50,000 – 25,000 = $25,000.
22
For five-year depreciable property like this sedan, the depreciation rate for the first
year is 20% of the adjusted basis. Rev. Proc. 87-57, 1987-2 C.B. 687. Thus: $25,000(.20) =
$5,000.
23
$25,000 – 5,000 = $20,000.
24
$25,000 + 5,000 = $30,000.
25
I.R.C. § 280F(a)(1)(A)(i) (2005).
26
Roger “saves” on taxes in the year of purchase simply because he is allowed to take a
greater deduction against his business income. The actual effect is not tax avoidance, but tax
deferral: when Roger is left with smaller amounts to deduct against income each year in the
rest of the five-year recovery period, there will be less deduction to offset his income, leav-
ing him with greater tax liability in subsequent years. But since this hypothetical assumes
that Roger is a taxpayer who prefers to pay taxes later, he is nonetheless happy to have a
smaller tax bill for 2004.
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676 LEWIS & CLARK LAW REVIEW [Vol. 9:3
than if he had simply claimed a regular first-year depreciation deduction,
28
without also trying to claim JGTRRA increased expensing or 50 percent bonus
depreciation deductions. Because Roger needs to continue depreciating the se-
dan over the rest of its five-year recover period, he will have to keep deprecia-
tion records.
B. Scenario 2: Purchasing a Sport Utility Vehicle for Business Use
When Roger went to the Mercedes dealership to view the E320 sedan in
person, a salesperson there advised him to consider using the money he was
planning to spend on a sedan to buy an SUV instead. Roger expressed disinter-
est in a larger vehicle, since he preferred the feel of driving a car, and he did
not really need the extra passenger room since he usually carried only one or
two clients with him at a time. Nonetheless, Roger remembered his tax advisor
saying something to him about getting bigger write-offs for heavy SUVs, and
he wondered whether buying the 2005 Mercedes ML500 Special Edition, a ve-
hicle that also fit into his budget at $50,000, would yield a greater tax write-off
for 2004. Intrigued, he called his tax advisor to request the following calcula-
tions.
Like the sedan, the SUV also qualifies as “section 179 property,” eligible
for a section 179 expensing deduction in the year of purchase. Unlike the se-
dan, however, if Roger elects to claim a section 179 deduction, the SUV’s full
$50,000 cost may be expensed in the first year. This is because the Mercedes
ML500 is one of many SUVs that weighs more than 6,000 pounds gross vehi-
cle weight, and therefore does not fit within the section 280F definition of pas-
senger automobile.
29
Fully expensing the SUV means that Roger will not have
to worry about keeping depreciation records. More significantly, deducting the
full $50,000 cost from his taxable income yields a tax savings of $17,500,
30
a
savings of $13,786.50 greater than the amount he would save if he were to
maximize his expensing deduction for the sedan.
31
This illustrates the SUV tax
loophole as it exists in section 280F: simply by weighing more than 6,000
pounds, an SUV (or other heavy vehicle such as a pick-up truck) is not subject
27
Assuming Roger is in the 35% bracket: $10,610(.35) = $3,713.50.
28
$50,000(.20) = $10,000 regular depreciation deduction. When the taxpayer elects out
of bonus depreciation, the first-year depreciation amount is subject to an even stricter section
280F limitation of $2,960. I.R.C. § 280F(a)(1)(A)(i) (providing that the first-year limit on
depreciation deductions for passenger vehicles is $2,560); Rev. Proc. 04-20, 2004-1 C.B.
642 (adjusting the $2,560 for inflation, increasing it to $2,960). Thus, the $10,000 potential
first-year depreciation deduction for the sedan would be cut back to $2,960. $2,960(.35) =
$1,036 tax savings from claiming a regular depreciation deduction. $3,713.50 – 1,036 =
$2,677.50 difference in tax savings.
29
See I.R.C. § 280F(d)(5) (RIA 2005) (defining “passenger automobile”). For a list of
SUVs that weigh more than 6,000 pounds and are not subject to section 280F limits on first-
year expensing and depreciation deductions, see S
ELF EMPLOYED WEB, VEHICLES THAT
QUALIFY FOR GENEROUS SUV TAX BREAK, at http://www.selfemployedweb.com/suv-tax-
deduction-list.htm (last visited Apr. 14, 2005).
30
$50,000(.35) = $17,500.
31
$17,500 – 3,713.50 = $13,786.50.
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 677
to deduction limitations as would be a passenger automobile, even though the
SUV may cost the same and serve the same purpose (e.g., transporting passen-
gers) as the passenger automobile.
If Roger elected not to claim a section 179 expensing deduction, or if he
had already used up his deduction by claiming it for other section 179 property
he purchased in 2004, then Roger would need to turn to section 168 to depreci-
ate the cost of the SUV over the vehicle’s five-year recovery period. Although
a first-year depreciation deduction would not yield as great a benefit as fully
expensing the cost in the first year under section 179, the SUV again far sur-
passes the sedan in tax savings. Again, like the sedan, the SUV is “qualified
property” that is eligible for 50 percent bonus depreciation deduction in the first
year. But because the SUV is not a passenger automobile, Roger would now be
allowed to take the full $25,000 50 percent bonus depreciation deduction,
32
plus the $5,000 regular depreciation deduction.
33
This amounts to a $30,000
depreciation deduction for the first year,
34
$19,390 more than he would be al-
lowed to deduct as first-year depreciation for the sedan.
35
Furthermore, Roger
would save $10,500 in taxes,
36
$6,786.50 more than he would save if he maxi-
mized his depreciation deductions for the sedan;
37
and $9,464 more than if he
had only claimed a regular first-year depreciation deduction.
38
Again, Roger
would reap the benefits that come with the SUV tax loophole. Given that Roger
would like to save as much in taxes as possible in 2004, preferring instead to
defer his taxes to subsequent years, it is no small surprise that Roger ended up
choosing the SUV over the sedan.
III. SECTION 280F AND THE UNINTENDED SUV TAX LOOPHOLE
With tax incentives like increased expensing and bonus depreciation, the
SUV tax loophole is big enough to drive a Hummer through,
39
and businesses
and self-employed individuals like Roger are gladly making the most of it.
SUVs weighing more than 6,000 pounds gross vehicle weight fall outside the
section 280F(d)(5) definition of “passenger automobile,” meaning that heavy
SUVs are not subject to the section 280F limitations on expensing and depre-
ciation deductions. This is a loophole in a system that was originally intended
32
$50,000(.50) = $25,000.
33
For five-year depreciable property like this SUV, the depreciation rate for the first
year is 20% of the adjusted basis. Rev. Proc. 87-57, 1987-2 C.B. 687. Thus: $25,000(.20) =
$5,000.
34
$25,000 + 5,000 = $30,000.
35
$30,000 – 10,610 = $19,390.
36
$30,000(.35) = $10,500.
37
$10,500 – 3,713.50 = $6,786.50.
38
$10,500 – 1,036 = $9,464.
39
SIERRA CLUB, PRESIDENT BUSH: NO HUMMER LEFT BEHIND, at http://www.sierraclub
plus.org/hummerdinger/features/no_left.html (last visited Apr. 14, 2005) (a work of parody
that scoffs at the SUV tax loophole, dubbing it “a tax ‘loophole’ so big, you could drive a
Hummer H2 through it!”).
DUPIC GALLEY
678 LEWIS & CLARK LAW REVIEW [Vol. 9:3
to prevent “abusive tax deductions”
40
by businesses that purchased expensive,
luxury cars in order to enjoy bigger business expense deductions against gross
income. The weight classification included in section 280F(d)(5)(A)(ii) was in-
tended to separate passenger automobiles from heavier vehicles typically used
for farming, construction, and other hauling work (such as timber operations),
so that businesses needing vehicles in the latter category would be entitled to
uncapped expensing and depreciation deductions. But now that the SUV has
become a trendy alternative to the traditional passenger automobile (without
being classified as one), businesses that purchase expensive, luxury SUVs now
find themselves in the same favorable position as self-employed farmers and
construction workers.
A. The Original Purpose of Section 280F
Section 280F was added to the Code in 1984 to crack down on small busi-
ness owners and self-employed individuals who were abusing the cost recovery
system.
41
Such abuse took the form of businesses purchasing expensive luxury
automobiles for the purpose of taking large depreciation deductions in the years
of cost recovery, enabling businesses to enjoy an annual reduction in taxable
income.
42
As was typically the case, the cost and luxury of the automobiles “far
outweighed what was necessary for business use.”
43
Moreover, provided that
the business could spare the cash to buy a new car every few years, there was
an incentive to purchase a replacement automobile at the end of each recovery
period as a means of reducing taxable income every year.
44
In response to such abusive practices, Congress imposed limits (expressly
directed at “luxury automobiles”)
45
on the amount that could be deducted each
year as depreciation for passenger automobiles purchased for business use.
These deduction limitations also apply to section 179 expensing.
46
The amount
that could be deducted in a given year for depreciation was the same for all
passenger automobiles,
47
regardless of cost, thus destroying the incentive to
buy expensive Cadillacs and Mercedeses as part of a strategy to save on the an-
nual tax bill.
48
While these deduction limitations for luxury automobiles dem-
onstrate a policy choice by Congress not to subsidize the purchase of expensive
40
KEITH BRADSHER, HIGH AND MIGHTY: SUVS—THE WORLD’S MOST DANGEROUS
VEHICLES AND HOW THEY GOT THAT WAY 73 (2002).
41
Id.
42
Id.
43
Andrew D. Sharp, Living Large: Fuel Guzzler Tax Deductions, 51 OIL, GAS, &
ENERGY Q. 771, 772 (2003).
44
See BRADSHER, supra note 40, at 73 (explaining that the new limits on depreciation
deductions resulted in many business customers no longer being able to afford to purchase
the more expensive models, “nor could they replace their cars as often”).
45
I.R.C. § 280F (RIA 2005) is entitled “Limitation on depreciation for luxury automo-
biles.”
46
I.R.C. § 280F(d)(1) (RIA 2005).
47
I.R.C. § 280F(a)(1)(A) (RIA 2005).
48
BRADSHER, supra note 40, at 73; Sharp, supra note 43, at 772; Danny Hakim, In Tax
Twist, Big Vehicles Get the Bigger Deductions, N.Y.
TIMES, Dec. 20, 2002, at C1.
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 679
luxury cars for business use, the fact that vehicles weighing more than 6,000
pounds “unloaded gross vehicle weight” (“gross vehicle weight” in the case of
trucks or vans, a category that includes SUVs) were excluded from the section
280F(d)(5) definition of passenger automobile
49
demonstrates Congress’s other
policy choice to allow businesses “to take big tax deductions on vehicles used
for construction, farming, or hauling.”
50
Thus, a self-employed Realtor who
purchases a luxury sedan for transporting clients to and from open houses is
limited in how much he may deduct each year for the vehicle’s acquisition cost,
while a construction worker who needs a large, heavy vehicle to transport his
building materials is entitled to deductions unrestricted by section 280F.
B. The Advent of the SUV as a Trendy Luxury Vehicle Opens Up the SUV Tax
Loophole
Classifying passenger automobiles by weight rather than by function is
what leads to the SUV tax loophole as it exists in section 280F today.
51
Ini-
tially, the weight classification was sufficient to separate passenger automobiles
from the heavier trucks and vans that workers in farming, construction, timber,
and other hauling businesses relied on to do their work.
52
This achieved Con-
gress’s goal of denying big write-offs to those who abused the cost recovery
system by purchasing expensive, luxury cars just to save on taxes, while allow-
ing uncapped expensing and depreciation deductions to those who actually
needed the more expensive, heftier vehicles to do their work. This system of
discrimination, based on vehicle weight, fulfilled Congress’s intent so long as
the luxury vehicles businesspeople were interested in weighed less than 6,000
pounds. But the advent of the SUV as America’s new luxury vehicle of choice
changed businesses’ purchasing incentives, quickly working to open up the
SUV tax loophole in section 280F.
53
In recent years, there has been an “explosion of SUV, pickup, and minivan
sales”
54
in the United States, as consumers have increasingly preferred such ve-
hicles as a trendy alternative to the traditional passenger car.
55
A few authors
note that these vehicles, which the Code classifies as light trucks, now account
49
I.R.C. § 280F(d)(5)(A)(ii) (RIA 2005).
50
Hakim, supra note 48, at C1. See also BRADSHER, supra note 40, at 74 (explaining
that farmers benefited from the special treatment given to heavy vehicles in section 280F).
51
SELF EMPLOYED WEB, SUV TAX DEDUCTION: A HUMMER OF A TAX BREAK, at
http://www.selfemployedweb.com/suv-tax-deduction.htm (last visited Apr. 14, 2005).
52
Id.
53
See BRADSHER, supra note 40, at 74 (noting that “once Americans became accus-
tomed to the idea of driving midsized SUVs instead of cars, the depreciation rules buried in
the tax code would later prove a huge incentive for people to trade up into very large, luxury
SUVs”).
54
UNION OF CONCERNED SCIENTISTS, supra note 5.
55
MICHAEL L. BERGER, THE AUTOMOBILE IN AMERICAN HISTORY AND CULTURE: A
REFERENCE GUIDE 164–65 (2001) (noting that by the late 1990s, SUVs had become “enor-
mously popular with white-collar America” due to their roominess, versatility, and road-
handling attributes. “In addition, for reasons that are always difficult to explain, they became
very trendy, possibly because of their sporty and off-road images.”).
DUPIC GALLEY
680 LEWIS & CLARK LAW REVIEW [Vol. 9:3
for about half of the total U.S. new-vehicle market,
56
and the SUV—“today’s
quintessential suburban passenger vehicle”
57
—is now a common substitute for
cars, “even luxury cars.”
58
With the SUV’s current prevalence and popularity in
the American auto market (despite its poor gas mileage), businesses now have
the opportunity to buy a trendy, luxury vehicle that falls outside the definition
of passenger automobile, and therefore qualifies for uncapped deductions
against gross income. Moreover, recent tax incentives for new business asset
acquisition, including increased expensing and bonus depreciation, have wid-
ened the SUV tax loophole by enabling businesses to enjoy even greater un-
capped write-offs.
C. The Fuss About SUVs: Environmental Concerns
Environmentalists’ main concern with SUVs is their poor fuel efficiency.
SUVs are far less fuel efficient than cars and minivans,
59
and according to au-
thor Keith Bradsher, “as millions of Americans [have] switched to SUVs, espe-
cially big ones, overall gas mileage [has] suffered” in this country, with the av-
erage efficiency of all vehicles sold in the United States in steady decline.
60
The
SUV’s thirst for fuel not only gouges drivers’ wallets at the pump,
61
but also
contributes significantly to three larger problems: dependency on foreign oil,
air pollution, and global warming.
62
Naturally, there have been calls for higher
standards for the SUV’s fuel economy, and a push to encourage consumers to
56
CARL POPE & PAUL RAUBER, STRATEGIC IGNORANCE: WHY THE BUSH
ADMINISTRATION IS RECKLESSLY DESTROYING A CENTURY OF ENVIRONMENTAL PROGRESS 72
(2004) (noting that “wildly popular” SUVs and pickup trucks “now constitute more than half
of all vehicles sold in the United States”).
57
Ball & Lundegaard, supra note 5, at D1.
58
BRADSHER, supra note 40, at 73.
59
For instance, a large car such as a full-sized Chevrolet Impala gets 21 miles per gal-
lon (m.p.g.) in the city and 32 m.p.g. on the highway, and a minivan such as the Honda Od-
yssey gets 18 m.p.g. in the city and 25 m.p.g. on the highway. Id. at 407. Although minivans
are somewhat less efficient than large cars, both are still much better than SUVs. Id. For ex-
ample, a Ford Explorer gets just 14 m.p.g. in the city, id. at 222, and a Hummer gets a mere
13 m.p.g. in a combination of both city and highway driving. Id. at 378.
60
Id. at 241–42. The overall gas mileage of new vehicles purchased in the United
States peaked in the 1987 and 1988 model years at 25.9 m.p.g, declining to an average of
24.5 m.p.g. by the 1997 model year, and to 23.9 m.p.g. by 2001. Id.
61
For an economist’s argument that an SUV’s higher fuel consumption should not be
considered a problem if the consumer is willing to pay for the extra fuel, see Frank S. Ar-
nold, Complaints About SUVs Don’t Add Up, E
NVTL. F., Jan.-Feb. 2003, at 14.
62
See POPE & RAUBER, supra note 55, at 228 (arguing automakers should be required
to improve the fuel efficiency of vehicles in order to “reduce our dependence on Middle East
oil, shrink our disproportionate 25% contribution to the global warming problem, and reduce
our trade deficit, while enabling us to save money at the gas pump [and] clean up air pollu-
tion”). The SUV’s poor fuel economy is related to global warming “because the fuel burned
in an auto engine is a major source of carbon dioxide, believed to be one of the chief ‘green-
house gases’ raising the Earth’s temperature.” Jeffrey Ball, Road Rally: Global Auto Makers
Are Racing to Inject Diesel into Mainstream, W
ALL ST. J., Jul. 28, 2003, at A1. For more
information on the SUV’s harmful impact on the environment, see generally B
RADSHER, su-
pra note 40.
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 681
buy more fuel-efficient vehicles, including vehicles that do not rely entirely on
gasoline as their energy source.
63
Prior to the enactment of the Jobs Act, there was still a tax incentive for
businesses to choose heavy SUVs over more environmentally friendly vehicles,
despite the existence of a special provision in section 280F(a)(1)(C)
64
allowing
tripled deduction limits for electric vehicles.
65
But under current law (explained
in detail in Part V.B.), where expensing deductions for SUVs are limited to
$25,000 and bonus depreciation no longer exists, a small business would get
about the same write-off in the year of purchase for both the heavy SUV and
the electric passenger automobile. Thus, for a business that is both environmen-
tally conscious and in need of a passenger automobile, the SUV tax loophole is
now less likely to lure the business into making an unnecessary SUV purchase
just for the bigger write-off.
Of course, the write-off comparison and relative tax incentives of heavy
SUVs versus electric passenger automobiles depend on the price of the hybrid
vehicle that the business is considering buying. The write-offs are roughly
equivalent only if the business is considering the most expensive hybrid vehicle
on the market, assuming that the business has dual interests in helping the envi-
ronment and maximizing its year-of-purchase write-off. If the business is truly
primarily motivated by environmental concerns, then it would likely choose the
lower-priced, more fuel-efficient model of hybrid vehicle, in which case the
business would enjoy a full deduction for the price in the year of purchase, al-
63
For instance, hybrid vehicles such as the Honda Insight, Toyota Prius, and the Ford
Escape (a new hybrid SUV) have garnered increased popularity in recent years. The Honda
Insight far surpasses other vehicles in terms of gas mileage, achieving 61 m.p.g. in the city
and 68 m.p.g. on the highway. H
YBRIDCARS.COM, GAS MILEAGE, Apr. 14, 2005, at
http://www.hybridcars.com (last visited Feb. 13, 2005). The Ford Escape SUV gets 36
m.p.g. in the city and 31 m.p.g. on the highway, id., which is not as much as other hybrids,
but about double the gas mileage that a conventional Ford SUV, such as the Ford Explorer,
gets, as discussed in note 58, supra.
64
I.R.C. § 280F(a)(1)(C) (RIA 2004) provides that “in the case of a purpose built pas-
senger vehicle, . . . each of the annual limitations specified [for passenger automobiles] shall
be tripled.” A “purpose built passenger vehicle” is a passenger vehicle that was designed and
manufactured to “be propelled primarily by electricity.” I.R.C. § 4001(a)(2)(C)(ii) (RIA
2004). Thus, a taxpayer purchasing an electric passenger automobile for business use may
deduct up to triple the amount otherwise allowed for a gasoline-burning passenger automo-
bile.
65
Prior to the enactment of the Jobs Act, there was no special limit on section 179 ex-
pensing for SUVs, and 50% bonus depreciation was still in effect under JGTRRA. Thus, un-
der the old law, if Roger had purchased a heavy SUV, he would have been able to fully ex-
pense its cost in the year of purchase. Alternatively, if he had already used up his $102,000
section 179 expensing deduction on other section 179 property acquired in the same year, his
total depreciation deduction for the year would have been $30,000. See supra note 24 for
calculation. Roger represents self-employed individuals who buy very few business assets in
a given year; therefore, assuming the vehicle is the only section 179 property that Roger pur-
chased, his full expensing deduction for the SUV would be $18,170 greater than the maxi-
mum deduction allowed for electric cars. This means that even though section 280F rewards
purchasers of electric passenger automobiles with tripled deduction limits, prior to the en-
actment of the Jobs Act, the SUV tax loophole undermined that tax incentive by offering
even greater write-offs for environmentally unfriendly SUVs.
DUPIC GALLEY
682 LEWIS & CLARK LAW REVIEW [Vol. 9:3
though less than what could have been deducted for a more expensive, heavy
SUV. All this can be demonstrated by another hypothetical, broken into three
scenarios: 1) Roger choosing between a $50,000 heavy SUV and a hypotheti-
cally priced $50,000 hybrid passenger automobile (to offer a straight compari-
son); 2) Roger choosing between a $50,000 heavy SUV and a $30,000 hybrid
passenger automobile; and 3) Roger choosing between a $50,000 SUV and a
$19,000 Honda Insight (the most fuel-efficient hybrid vehicle on the market).
1. Scenario 1: Choosing Between a Heavy SUV and a Comparatively Priced
Hybrid Passenger Automobile
If Roger purchases a $50,000 heavy SUV, the most he may deduct in the
year of purchase under current law for both section 179 expensing and regular
depreciation is $30,000.
66
If Roger found a hybrid passenger automobile that
also cost $50,000, Roger would be entitled to fully expense the purchase price
under section 179,
67
but section 280F(a)(1)(C) would limit his deduction to
$31,830,
68
which is three times the limit for conventional passenger automo-
biles. Thus, when doing a straight comparison, this scenario shows that there is
a slight tax incentive to choose a like-priced hybrid over the heavy SUV, espe-
cially if Roger’s environmental concerns weigh-in to tip the balance.
2. Scenario 2: Choosing Between a Heavy SUV and the Most Expensive
Hybrid Passenger Automobile on the Market
No hybrid compact car or sedan currently on the market costs $50,000.
69
Assuming Roger wants to both help the environment and maximize his write-
off, he could consider purchasing a Honda Accord Hybrid, which, at about
$30,000,
70
is the most expensive hybrid passenger automobile on the market.
71
If Roger bought this hybrid passenger automobile, he could expense the full
price of the vehicle in the year of purchase, leaving $1,830
72
of his section
280F(a)(1)(C) treble deduction limit unused. Thus, Roger could deduct $30,000
whichever vehicle he chooses, the heavy SUV
73
or the hybrid passenger auto-
mobile. If Roger truly only needed a vehicle to drive around his clients, and he
preferred a vehicle that would get better gas mileage, he would choose the hy-
brid vehicle. But personal preferences aside, the special rule for electric pas-
senger automobile deductions and the new rule that limits SUV expensing
66
The Jobs Act added paragraph (6) to section 179(b) to impose a $25,000 limit on sec-
tion 179 deductions for heavy SUVs. The Jobs Act extended increased expensing two more
years, through the end of 2007. The Jobs Act, supra note 4, at § 910(a). Thus: $50,000 –
25,000 expensing deduction = $25,000 adjusted basis. $25,000(.20) = $5,000 regular depre-
ciation deduction. $25,000 + 5,000 = $30,000 total deduction for the year of purchase.
67
The Jobs Act extended section 179 increased expensing two more years, through the
end of 2007. Jobs Act, supra note 4, at § 201.
68
Rev. Proc. 2004-20, supra note 14, at Table 6.
69
HYBRIDCARS.COM, supra note 63.
70
Id.
71
Id.
72
$31,830 − 30,000 = $1,830.
73
See supra note 66 for calculation.
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 683
make it so that there is no tax incentive in favor of either vehicle for the year of
purchase.
3. Scenario 3: Choosing Between a Heavy SUV and the Most Fuel Efficient
Hybrid Passenger Automobile on the Market
Of course, if Roger were a true friend of the environment, he would con-
sider purchasing the most fuel-efficient hybrid passenger automobile on the
market, the Honda Insight. The Honda Insight gets about double the gas mile-
age that the Honda Accord Hybrid gets,
74
and it costs only $19,000.
75
Again,
the generous section 280F(a)(1)(C) deduction limitation for electric passenger
automobiles would allow Roger to fully expense the $19,000 price under sec-
tion 179. Clearly, if Roger only needs a passenger automobile and cares about
the environment, this is a great deal. But this scenario also shows how the tax
incentives may shift in favor of the more expensive, heavy SUV (or even the
more expensive, less fuel efficient hybrids) once the hybrid’s price dips below
$30,000. Assuming Roger is truly an environmentalist at heart, he would
choose the hybrid and enjoy a full write-off of its price in the year of pur-
chase.
76
But the opportunity to take a bigger write-off just by purchasing a dif-
ferent kind of vehicle might tempt Roger to choose the heavy SUV anyway,
even though the larger vehicle is more than he needs for his business. This is
how the SUV tax loophole facilitates abuse
77
of the cost recovery system.
IV. THE SUV TAX LOOPHOLE AT THE STATE LEVEL
A. State Response to the Federal Tax Incentives That Widen the SUV Tax
Loophole
Nearly all state revenue codes are based on the federal system.
78
When
JCWAA was passed in 2002, about half of the 46 states that based all or por-
tions of their corporate tax codes on the Code had tax systems that “automati-
74
See HYBRIDCARS.COM, supra note 63 (showing that the Honda Insight gets 60 m.p.g.
in the city and 65 m.p.g. on the highway, while the Honda Accord Hybrid gets 30 m.p.g. in
the city and 37 m.p.g. on the highway, about half the gas mileage that the Honda Insight
gets).
75
Id.
76
Although Roger may be happy to fully deduct the vehicle’s cost against his busi-
ness’s gross income in the year of purchase, it must be remembered that the tax benefit is
really just a matter of timing. Deducting the entire price in the year of purchase means there
is no cost basis remaining to depreciate in later years, so that no amount of the vehicle’s
price will be spread out to reduce gross income in future years. The bottom line is that
greater deductions allow greater tax deferment, which may be especially beneficial to a busi-
ness taxpayer who expects to have more income this year than in later years.
77
Certainly the businesses that are lured in by the bigger write-off would consider this
“making the most of” the cost recovery system.
78
Andrew Caffrey, States Balk at Cuts in Federal Business Taxes, WALL ST. J., Mar.
18, 2002, at A2; Federation of Tax Administrators, Breaking Up is Hard to Do: States Re-
spond to Federal Bonus Depreciation, T
AX ADMINS. NEWS, Apr. 2002, available at
http://www.taxadmin.org/fta/rate/decoupling/tan_art.html.
DUPIC GALLEY
684 LEWIS & CLARK LAW REVIEW [Vol. 9:3
cally” conformed to the changes made to the federal tax laws, unless the state
legislatures took action to “decouple” (i.e., deviate) from certain provisions in
the Code.
79
Where state tax law does not automatically conform to changes in
federal tax law, the legislatures periodically update their codes as of a certain
date in the federal code.
80
Either way it is done, state conformity with the Code
means that the SUV tax loophole and the federal tax incentives that widen that
loophole apply at the state level as well. Thus, while section 179 expensing and
section 168(k) bonus depreciation are costing the federal government billions in
lost tax dollars and contributing to a massive federal budget deficit, states are
losing out on tax revenues as well.
81
As one author noted, this comes at a time
when “[s]tates face their worst financial crisis in 50 years.”
82
Another author
explains, “[w]hile the federal government can and almost always does run large
deficits, that is not an option for states.”
83
This is because nearly all states must
maintain balanced budgets, as required by their state constitutions.
84
Faced with the task of balancing their budgets, state legislatures must
make a choice: conform their state tax systems to the Code and find other ways
to meet their budget constraints, or decouple from the federal tax incentives,
thereby protecting themselves from revenue loss, but disappointing business
taxpayers in the process. Although the fundamental choice is between confor-
mity and decoupling, actual state responses to the federal tax incentives fall
along a varied spectrum. What follows is a general overview of state responses.
1. State Conformity with the Federal Tax Incentives
Prior to the enactment of the Jobs Act, only twelve states completely con-
formed with increased expensing and bonus depreciation as provided for under
JCWAA and JGTRRA.
85
As of this writing, no data is available regarding how
79
Caffrey, supra note 77; Federation of Tax Administrators, supra note 77.
80
Caffrey, supra note 77; Federation of Tax Administrators, supra note 77.
81
Tim Catts, Bush’s Tax Cuts Take a Bite Out of States’ Budgets, 100 TAX NOTES
1098, 1098 (2003) (noting that because “state revenue codes are by and large based on the
Internal Revenue Code, . . . changes wrought on Capitol Hill reverberate in state capitals
across the country”).
82
Bob Kemper, Bush Not Helping States, Experts Say: Underfunded Mandates Burden
Tax-Shy Coffers, C
HI. TRIB., May 30, 2003, at C11. See also NATIONAL CONFERENCE OF
STATE LEGISLATURES, STATE BUDGET & TAX ACTIONS 2004: PRELIMINARY REPORT 1 n.4,
available at http://www.ncsl.org/print/fiscal/presbta04.pdf (last visited June 20, 2005) (not-
ing that since fiscal year 2002, states have closed a cumulative budget gap exceeding $235
billion).
83
Doug Sheppard, NGA, NCSL: Federal Stimulus Will Cost States Billions, 94 TAX
NOTES 1414, 1414 (2002).
84
Catts, supra note 80; Vivian Marino, That Out-of-State Shopping Trip May Buy a
Higher Tax Bill, N.Y.
TIMES, Feb. 15, 2004, at C11.
85
States fully conforming to JCWAA and JGTRRA business growth incentives in-
clude: Alabama, Alaska, Colorado, Delaware, Kansas, Louisiana, Missouri, Montana, New
Mexico, North Dakota, Oregon, and Utah. THOMSON RIA, UPDATE: STATE CONFORMITY
WITH
2002 AND 2003 FEDERAL DEPRECIATION AND EXPENSING LEGISLATION (Article No. ta-
042004-0036, Apr. 20, 2004), available at http://riacheckpoint.com. [hereinafter State Con-
formity Rules]. Missouri, however, disallows 30% bonus depreciation claimed under
JCWAA on purchases made between July 1, 2002 and June 30, 2003. Id. at n.6.
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 685
many states conform with the Jobs Act changes to these tax incentives; how-
ever, it remains true that while some states automatically conformed to the Jobs
Act changes on the date of its enactment, it remains to be seen whether other
states will affirmatively adopt a post-enactment date to update their codes and
adopt those changes. For example, after JCWAA and JGTRRA were enacted, a
few states updated their codes by conforming them to the federal system as of
specified post-enactment dates, thereby affirmatively adopting the increased
expensing and bonus depreciation rules for their states.
86
Because the Jobs Act
is still relatively new, it may take a while for states to decide how to respond to
the new changes in federal law. The bottom line is, some states may already
conform with the two-year extension for increased expensing and the expiration
of bonus depreciation, while many states may still conform to pre-Jobs Act law
that still allows both increased expensing and bonus depreciation.
State conformity with federal tax incentives means that small business
owners and self-employed individuals enjoy faster write-offs for their pur-
chases of qualifying property on both their federal and state tax returns. Al-
though tax savings to businesses translates to less tax revenue and more budg-
etary restraints to states, those states that choose conformity have good reasons
for it. Many states choose conformity for the sake of consistency between state
and federal rules,
87
and to avoid the “logistical nightmare” of requiring business
taxpayers to keep two sets of records to track the values of their depreciating
assets.
88
Conformity also avoids disappointment to businesses that otherwise
enjoy greater write-offs on their federal returns. Another reason to conform
with the federal tax incentives, one Tax Notes author asserts, is to avoid the risk
that the state will “miss[] out on [the] economic stimulus encouraged by the
cuts.”
89
According to an article in The Tax Advisor, “the federal-stimulus legis-
lation [may] benefit states in the long run” if the tax incentives “generate a sig-
nificant increase in employment and profits” for businesses.
90
86
For example, on May 28, 2004, the Florida state legislature passed new legislation
conforming Florida’s tax code to the Internal Revenue Code as of January 1, 2004, thereby
adopting increased section 179 expensing and 50% bonus depreciation as allowed under
JGTRRA. State Conformity Rules, supra note 85 at n.2 (noting that the legislation to con-
form Florida’s tax laws to JGTRRA was pending as of April 1, 2004); G
RANT THORTON,
STATE AND LOCAL TAX ALERT: UPDATE OF STATE ACCEPTANCE OF FEDERAL BONUS
DEPRECIATION, at http://www.grantthornton.com/downloads/SALT_2-4-04_90621.pdf (last
visited Aug. 13, 2004) (noting that legislation to conform Florida’s tax laws to JGTRRA was
signed into law on May 28, 2004). Prior to the recent enactment, the Florida system had al-
ready conformed to 30% bonus depreciation under JCWAA. State Conformity Rules, supra
note 85.
87
Catts, supra note 81, at 1099 (noting that in states that have chosen not to conform,
“taxpayers must follow two different sets of rules when preparing their returns”).
88
Caffrey, supra note 78.
89
Catts, supra note 81, at 1099 (noting that “[a]ny time you have reduced taxes on
capital and wages, you’ll see greater economic benefits overall”).
90
See Val Oveson et al., States, Localities Respond to Federal Stimulus Legislation, 33
T
AX ADVISER 453, 453 (2002).
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686 LEWIS & CLARK LAW REVIEW [Vol. 9:3
Of course, the fact remains that conformity comes at a cost: spending must
be cut, and other taxes and fees must be raised, in order make ends meet.
91
Ac-
cording to the executive director of the National Governors’ Association,
“[e]ducation will clearly be the big loser as governors struggle to balance their
budgets.”
92
Although these are budget difficulties some conforming states
chose to accept, others did not necessarily conform voluntarily. For example,
the Colorado State Legislature is barred by its constitution from “retroactive
decoupling,”
93
a move that could have spared the state from a projected $127
million loss in revenue through fiscal year 2005;
94
the Colorado constitution
allows only prospective decoupling.
95
And some conforming states, such as
Utah, are considering decoupling from the federal code in order to avoid further
revenue loss.
96
Indeed, it was out of this concern for lost revenue dollars that
the majority of states chose to decouple from the JCWAA and JGTRRA provi-
sions for increased expensing and bonus depreciation.
2. State Decoupling from the Federal Tax Incentives
After the enactment of JCWAA and JGTRRA, most states chose to de-
couple, in whole or in part, from the federal provisions for increased expensing,
bonus depreciation, or both.
97
Although there is currently no data regarding
state decoupling in response to the Jobs Act, states must decide whether to de-
couple from the two-year extension of increased expensing, the expiration of
bonus depreciation, or both. States interested in preserving tax revenues may
choose to decouple from the two-year extension; states interested in keeping
bonus depreciation on the books may decide to write an extension into their
own tax codes.
91
Caffrey, supra note 78.
92
Sheppard, supra note 83, at 1415 (according to the executive director of the National
Governors’ Association, “[l]ayoffs, larger class sizes, forgoing school repairs, tuition in-
creases for higher education—these are the real-life, hard choices governors will have to
make in light of the action Congress took”).
93
Catts, supra note 81, at 1098.
94
Id. (noting that retroactive decoupling, if permitted by the Colorado constitution,
could have spared the state from suffering revenue losses); N
ICHOLAS JOHNSON, CENTER ON
BUDGET AND POLICY PRIORITIES, FEDERAL TAX CHANGES LIKELY TO COST STATES BILLIONS
OF
DOLLARS IN COMING YEARS, available at http://www.cbpp.org/6-3-03sfp.htm [hereinafter
CBPP
REPORT] (Rev. June 5, 2003) (projecting the total loss of revenue to Colorado through
fiscal year 2005 that would result from the state’s conformity with both increased expensing
and bonus depreciation provisions). If Congress were to extend increased expensing and bo-
nus depreciation, CBPP projects Colorado’s total revenue loss to be $868 million through
2013. Id.
95
Catts, supra note 81, at 1098.
96
Id. (noting that the Utah legislature may consider decoupling to avoid further reve-
nue loss); CBPP
REPORT, supra note 94 (projecting that Utah’s conformity with both in-
creased expensing and bonus depreciation provisions will cost the state $64 million in lost
revenue through fiscal year 2005).
97
See generally State Conformity Rules, supra note 85 (using a chart to break down
how each state treats the JCWAA and JGTRRA federal rules for bonus depreciation and in-
creased expensing).
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 687
Generally, states chose one of two approaches when decoupling from the
JCWAA and JGTRRA provisions for increased expensing and bonus deprecia-
tion. The first approach was to disallow one or both federal tax incentives en-
tirely, retaining instead the depreciation or expensing rules as they existed prior
to JCWAA or JGTRRA.
98
The second approach was to require an “add-back”
of some or the entire amount that was deducted for expensing or depreciation
on the federal return.
99
The states that choose to decouple from the two-year
extension of increased expensing under the Jobs Act similarly may choose one
of these two approaches. Either way, in decoupling states, businesses must con-
tend with different expensing and depreciation rules, and will enjoy little or
none of the big write-off they enjoy at the federal level.
100
B. Legislative Effort to Close the SUV Tax Loophole at the State Level
To decide whether to conform with or decouple from the JCWAA and
JGTRRA provisions for increased expensing and bonus depreciation, the state
legislatures considered the overall impact that these tax incentives would have
on their states’ economies. Although the tax incentives could play a small part
in stimulating an economic turnaround, they would certainly be costly for states
as well. While legislatures dealt with the issue of whether to allow these tax in-
centives generally, some state legislators noticed how these tax incentives in-
teracted with section 280F to enhance the SUV tax loophole. For various fiscal
and policy reasons, legislators responded by proposing laws aimed directly at
closing the SUV tax loophole at the state level. Although legislative efforts to
close the SUV tax loophole in Maryland, California, and Oregon
101
have failed,
these efforts demonstrate state level concern for the federal loophole’s impact
on revenue collections and the environment, and stand as examples for the kind
of legislation Congress should pass to close the SUV tax loophole at the federal
level.
98
Federation of Tax Administrators, supra note 78 (discussing the ways that states may
decouple from federal bonus depreciation); CBPP
REPORT, supra note 94 (discussing the
ways that states may decouple from federal changes to section 179 expensing).
99
Federation of Tax Administrators, supra note 78 (discussing the ways that states may
decouple from federal bonus depreciation); CBPP
REPORT, supra note 94 (discussing the
ways that states may decouple from federal changes to section 179 expensing).
100
For a detailed summary of how each state treats the JCWAA and JGTRRA federal
rules for increased section 179 expensing and bonus depreciation, see State Conformity
Rules, supra note 85. See also G
RANT THORTON, supra note 86 (providing a chart summariz-
ing each state’s position and conformity with federal bonus depreciation under JCWAA and
JGTRRA as of June 7, 2004); BNA SOFTWARE, STATE CONFORMITY WITH FEDERAL
DEPRECIATION RULES, at http://www.bnasoftware.com/knowledgecenter/state%20
depreciation (last visited Apr. 18, 2005) (providing a pull-down menu for looking up each
state’s current position as to federal bonus depreciation, with links to each state’s department
of revenue website).
101
See generally STATE ENVIRONMENTAL RESOURCE CENTER, ISSUE: BUSINESS SUV
TAX BREAK, at http://www.serconline.org/suvTaxBreak.html (last updated Mar. 11, 2004)
(listing Maryland, California, and Oregon as states to watch because they had all taken ac-
tion to close the SUV tax loophole).
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688 LEWIS & CLARK LAW REVIEW [Vol. 9:3
1. Maryland
In the interest of increasing state tax revenue,
102
Maryland Senate Bill
219,
103
entitled “Sport Utility Vehicle Business Tax Loophole Closure Act,”
was introduced on January 28, 2004,
104
to amend Maryland tax law so that
“heavy duty SUVs” would also be subject to the section 280F limitations on
expensing and depreciation deductions for passenger automobiles. To achieve
this, the proposed law defines a “heavy duty SUV” as a vehicle with a gross
vehicle weight between 6,001 and 14,000 pounds, which “would be a passenger
automobile as defined in section 280F of the Code if it were rated at 6,000
pounds gross vehicle weight or less.”
105
So defined, heavy duty SUVs would be
subject to the same deduction limitations as are passenger automobiles. Thus,
when business taxpayers compute their Maryland income taxes, they would be
required to add back to their federal adjusted gross income any amount of ex-
pensing or depreciation deduction taken on the federal income tax return that
exceeded the section 280F deduction limit.
106
The bill is still pending, but the Maryland legislature has not taken any ac-
tion on it since March 10, 2004.
107
To its credit, the bill would operate to pre-
vent abusive deduction practices by businesses that buy heavy SUVs just for
the tax breaks, resulting in increased tax revenues for Maryland. Maryland
Senate Bill 219 proposes to do this by targeting heavy duty SUVs specifically;
however, the definition may be broad enough to include all trucks and vans, de-
spite the exclusive SUV label. As the definition is applied in section 280F,
SUVs are a subset of trucks and vans, which are generally excluded from the
passenger automobile definition for weighing too much. Thus, as Maryland’s
proposed heavy duty SUV definition is worded, it could apply to the entire
trucks and vans category, creating uncertainty as to whether unlimited deduc-
tions are preserved for anyone, since the definition also fails to include any ex-
ceptions for certain industries or lines of work (e.g., farming, construction, tim-
ber, and other hauling businesses).
The proposed law goes against the original intent of section 280F because
it would deny tax breaks not only to those who abuse the cost recovery system,
but also to those who were originally favored to reap a greater benefit from it.
102
The Comptroller’s Office of the Maryland Department of Legislative Services esti-
mated that the proposed changes to Maryland’s tax laws would result in a $33.3 million net
increase in state tax revenue for fiscal year 2005. D
EP’T OF LEGIS. SERV., MD. GEN. ASSEMB.,
S.B. 219, FISCAL AND POLICY NOTE, 2004 Leg., 418th Sess., at 1 (2004), available at
http://mlis.state.md.us/2004rs/billfile/SB0219.htm.
103
S.B. 219, 2004 Leg., 418th Sess. (Md. 2004), available at http://mlis.state.md.us/
2004rs/billfile/SB0219.htm.
104
Id.
105
Id. at § 1(a)(3) provides as follows: “Heavy Duty SUV” means a 4-wheeled vehicle
that: is manufactured primarily for use on public streets, roads, and highways; is rated at
more than 6,000 but not more than 14,000 pounds gross vehicle weight; and would be a pas-
senger automobile as defined in section 280F of the Internal Revenue Code if it were rated at
6,000 pounds gross vehicle weight or less.
106
Id. at § 1(b)(3).
107
DEP’T OF LEGIS. SERV., MD. GEN. ASSEMB., S.B. 219: HISTORY BY LEGISLATIVE
DATE, Reg. Sess. (2004), available at http://mlis.state.md.us/2004rs/billfile/SB0219.htm.
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 689
These observations may explain why there has been so little activity on the bill.
In any event, Maryland Senate Bill 219 is an example of an approach Congress
might take to include large SUVs expressly in the definition for passenger
automobiles, although Congress should also take care to ensure that those who
need the features of heavier vehicles to conduct their businesses are still exempt
from the deduction limitations, in accordance with the original intent of section
280F.
2. California
The drafters of Maryland Senate Bill 219 were primarily concerned with
ending the abusive deduction practices that were costing their state millions of
dollars in lost tax revenues; accordingly, their proposed remedy to the SUV tax
loophole was to amend the passenger automobile definition so that section
280F deduction limitations would also apply to heavy SUVs. The drafters of
California Assembly Bill 848
108
took their remedy a step further: primarily mo-
tivated by concerns for the environment, California legislators proposed re-
warding businesses that purchase “qualified reduced-emission” vehicles at the
expense of businesses that purchase “large SUVs” unnecessary
109
to their line
of work. The bill failed when put to a vote on the assembly floor on January 29,
2004.
110
The drafters acknowledged that the “large vehicle provision” in section
280F, that was originally intended to “benefit farmers and businesses that use
trucks or vans to carry out their work,” had become an incentive for businesses
to make unnecessary purchases of “environmentally unfriendly” “large[], less
fuel-efficient SUVs” that also contribute to the deterioration of California’s
108
Assemb. B. 848, 2003-04 Leg., Reg. Sess. (Cal. 2004).
109
By “unnecessary,” the author means that the vehicle purchased has features (e.g.,
towing capacity, hauling space) that are not necessary to the business purchaser’s line of
work. Although the vehicle may be used in the taxpayer’s business (e.g., transporting clients
or employees to and from meetings during work hours), the vehicle’s size is essential only
for tax, not work, purposes. For example, business professionals such as doctors, lawyers,
and self-employed Realtors may choose a much larger vehicle than is necessary to fulfill
their business travel needs just so that they have a vehicle for business use that qualifies for
the large first-year deductions. See, e.g., Jeffrey Ball & Karen Lundegaard, Tax Breaks for
the Merely Affluent: Quirk in Law Lets Some SUV Drivers Take Big Deduction, W
ALL ST. J.,
Dec. 19, 2002, at D1 (Mark Sherrard, a doctor who lives in Monroe, Mich., bought a new
Chevrolet Suburban at the prompting of his accountant, saying that he “wanted to get a new
vehicle anyway,” and with the accelerated tax breaks, his purchase “was a no-brainer.”);
Danny Hakim, In Tax Twist, Big Vehicles Get the Bigger Deductions, N.Y.
TIMES, Dec. 20,
2002, at C1. (Additionally, accountant Jim Jenkins acknowledges that the SUVs that qualify
for the tax breaks are “bigger than anything [he would] want,” but admits that it is “tempt-
ing” to purchase one anyway just to get the larger first-year deduction.). See also Richard A.
Westin, The SUV Advantage, 94 T
AX NOTES 1360, 1361 (2002) (noting that most SUVs,
pick-up trucks, and vans on the roads today “do the work of cars”).
110
LEG. COUNSEL OF CAL., ASSEMB. BILL 848: HISTORY, 2003-04 Leg., Reg. Sess.
(2004), available at http://www.leginfo.ca.gov/bilinfo.html; L
EG. COUNSEL OF CAL.,
ASSEMB. BILL 848: VOTE INFORMATION, 2003-04 Leg., Reg. Sess. (2004), available at
http://www.leginfo.ca.gov/pub/03-04/bill/asm/ab_0801-
0850/ab_vote_20040129_0214pm_asm_floor.html.
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690 LEWIS & CLARK LAW REVIEW [Vol. 9:3
roads and highways.
111
California Assembly Bill 848 asserted that as a matter
of public policy, “California should not allow these federal incentives for large
SUVs.”
112
Furthermore, the drafters asserted that “California should actively
reward” purchases of qualified reduced-emission vehicles with a $1,000 credit
against tax,
113
and effectively punish businesses that purchase large SUVs by
completely denying them certain tax incentives for such vehicles, including all
expensing and depreciation deductions.
114
Moreover, because the drafters’ goal
was to make the law “revenue neutral,”
115
they provided that the aggregate
amount of credits granted to all taxpayers in a given year would be equal to the
estimated increase in taxes paid for the same year attributable to the denied de-
ductions related to large SUVs.
116
Essentially, the bill proposed that purchasers
of large SUVs subsidize the purchases of lighter, more fuel-efficient vehicles.
In pertinent part, California Assembly Bill 848 defines “large sport utility
vehicle” as a “four-wheeled vehicle . . . rated between 6,000 and 14,000 pounds
gross vehicle weight.”
117
Like Maryland Senate Bill 219, California Assembly
Bill 848 includes an SUV definition that applies to all trucks and vans; how-
ever, it also expressly excludes from the definition such vehicles purchased for
use in farming, construction, or timber businesses.
118
Doing this preserves un-
capped expensing and depreciation deductions for certain businesses that need
large vehicles to perform their work, keeping with the original intent of section
280F. Congress should take similar action.
Another feature that distinguishes the California bill from the Maryland
bill is its proposal to punish businesses that make unnecessary purchases of
large SUVs by denying them the tax-saving benefit of expensing and deprecia-
tion deductions.
119
Moreover, once businesses began paying taxes on the in-
111
The drafters acknowledged these legislative findings both within the language of the
bill itself and in their comments to the bill. Cal. Assemb. B. 848 at § 1(b)−(d); L
EG. COUNSEL
OF
CAL., ASSEMB. BILL 848: ANALYSIS, 2003-04 Leg., Reg. Sess. (2004), available at
http://www.leginfo.ca.gov/pub/03-04/bill/asm/ab_0801-
0850/ab_848_cfa_20040128_asm_floor.html.
112
Cal. Assemb. B. 848 at § 1(e).
113
Id. at § 2.5; Cal. Assemb. B. 848 Analysis, at 3–4.
114
Cal. Assemb. B. 848 at § 3(a)(1)−(5); Cal. Assemb. B. 848 Analysis, supra note
110, at 4.
115
Cal. Assemb. B. 848 Analysis at 3.
116
Cal. Assemb. B. 848 at § 2.5(c); Cal. Assemb. B. 848 Analysis, at 3.
117
Cal. Assemb. B. 848 at § 3(b) provides as follows: [T]he term “large sport utility
vehicle” means a four-wheeled vehicle manufactured primarily for use on public streets,
roads, and highways if the vehicle meets all of the following requirements: (1) Is rated be-
tween 6,000 and 14,000 pounds gross vehicle weight. (2) Is designed to seat nine or fewer
individuals. (3) Is not equipped with an open cargo area with an interior length of 72 or more
inches or does not have a covered box with an interior length of 72 or more inches that is
separate from the passenger compartment.
118
Id. at § 3(c).
119
Id. at § 3(a). Of course, although the business would not be permitted to recover the
large SUV’s cost by taking expensing and depreciation deductions against taxable income in
the years the business owned the vehicle, the business would ultimately recover its cost (and
save on taxes) when the SUV is sold, and the cost basis is applied against the amount real-
ized for the asset. This, however, is cold comfort for a business that would much rather save
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 691
come used to buy their large SUVs, California would not be the beneficiary of
the increased cash flow because the law proposes using that money to award
tax credits to businesses that purchase lighter, more fuel-efficient vehicles.
Although California Assembly Bill 848 ultimately failed to pass, its provi-
sions constitute a clear statement of the drafters’ environmental policy, of
which Congress should take note. But rather than create an affirmative disin-
centive to purchase a large SUV for business use (a proposal which met much
criticism in the California assembly),
120
a more balanced approach would be to
follow the Maryland drafters’ example by simply removing the lucrative tax
incentives for businesses to buy big, and treat large SUVs as subject to the
same deduction limitations as passenger automobiles under section 280F.
3. Oregon
The endeavor to close the SUV tax loophole in Oregon has a longer and
more complicated history than the legislative efforts made in Maryland and
California. Although Oregon legislators came close to closing the SUV tax
loophole in their state, like their counterparts in Maryland and California, their
legislative effort ultimately failed as well.
The proposal to close the SUV tax loophole underwent many changes be-
fore the Oregon Legislature finalized and enacted its approach to closing the
loophole. The proposal was originally introduced on February 25, 2003
121
as
Oregon House Bill 2747,
122
and provided for an add-back-the-difference ap-
proach similar to what would later be proposed in Maryland Senate Bill 219.
As originally drafted, Oregon House Bill 2747 provided that, for the purpose of
determining Oregon income tax liability, taxpayers who purchased vehicles
weighing more than 6,000 pounds
123
for business use must add back to their
federal taxable income the amount of any difference between what was allowed
as expensing or depreciation deductions on the federal return, and what would
have been allowed as deductions on the federal return if the vehicle had been
subject to section 280F deduction limitations.
124
This approach would have re-
moved the incentive for businesses to choose heavy SUVs for the bigger write-
on taxes now than many years later when the SUV is finally sold.
120
Cal. Assemb. B. 848 Analysis at 4. Opponents of the bill expressed concern that the
bill would result in an increased tax burden for small businesses, possibly resulting in the
inability to continue business operations. Id. Opponents also feared the bill would “depress
vehicle sales in a difficult economic climate.” Id. Finally, “opponents question[ed] why
SUV purchasers should subsidize” purchases of qualified reduced-emission vehicles. Id.
121
OR. LEG., H.B. 2747 MEASURE HISTORY, 72d Leg., Reg. Sess. (2003), available at
http://www.leg.state.or.us/searchmeas.html (last visited Apr. 13, 2005).
122
H.B. 2747, 72d Leg., Reg. Sess. (Or. 2003), available at
http://www.leg.state.or.us/searchmeas.html.
123
House Bill 2747, as originally introduced, specified that the modification to federal
taxable income was required where expensing or depreciation deductions were taken on a
“four-wheeled vehicle manufactured primarily for use on public streets, roads and high-
ways . . . and [t]he vehicle [was one] rated at 6,000 pounds unloaded gross vehicle weight or
more[, or] a truck or van . . . rated at 6,000 pounds gross vehicle weight or more.” Id. at §§
2(1), 5(1). SUVs fall into the latter category with trucks and vans.
124
Id. at §§ 2(2)(a)−(b), 5(2)(a)−(b).
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692 LEWIS & CLARK LAW REVIEW [Vol. 9:3
off. Then the House amended its approach to resemble the one proposed in
California Assembly Bill 848, so that A-Engrossed Oregon House Bill 2747
125
provided that taxpayers must add back the “entire amount” of expensing and
depreciation deductions allowed on the federal return for vehicles “rated be-
tween 6,000 and 14,000 pounds gross vehicle weight.”
126
This approach would
have created an affirmative disincentive to buy a heavy SUV for business pur-
poses. The House changed its approach again when it transformed the disincen-
tive into an expensive penalty, providing in B-Engrossed Oregon House Bill
2747
127
that taxpayers must add back “three times the amount” taken as deduc-
tions for such vehicles.
128
This third approach included exceptions for vehicles
used in farming, construction, and timber businesses.
129
These progressively
harsher approaches to closing the SUV tax loophole were driven by the
House’s concern that the SUV tax breaks ran contrary to the original intent of
section 280F,
130
resulting in an unnecessary loss in tax revenue for the state.
131
While the House was working out the details of its approach to closing the
SUV tax loophole, the state legislature was also trying to alleviate Oregon’s
budget crisis with House Bill 2152,
132
which included many provisions for in-
creasing tax revenues. Legislators added the substance of Oregon House Bill
2747 (the “entire amount” approach, along with the exceptions for farming,
construction, and timber industries) as another revenue-raising provision of
125
A-Engrossed H.B. 2747, 72d Leg., Reg. Sess. (Or. 2003), available at
http://www.leg.state.or.us/searchmeas.html.
126
Id. at §§ 2(1), 5(1). It should be noted that this second version of House Bill 2747
has narrowed its definition of vehicles to which the provision would apply to those “rated
between 6,000 and 14,000 pounds gross vehicle weight.” Id. at §§ 2(1)(a), 5(1)(a). This fo-
cuses the provision on the category including heavy SUVs.
127
B-Engrossed H.B. 2747, 72d Leg., Reg. Sess. (Or. 2003), available at http://www.
leg.state.or.us/searchmeas.html.
128
Id. at §§ 2(1), 5(1).
129
Id. at §§ 2(3), 5(3).
130
OR. LEG. HOUSE STAFF, A-ENGROSSED, H.B. 2747 MEASURE SUMMARY, 72d Leg.,
Reg. Sess. (2003), available at http://www.leg.state.or.us/searchmeas.html. (providing as
background information the fact that “over twenty years ago,” the vehicles that were eligible
for the exclusion from deduction limitations were “mostly industrial vehicles, including
cargo vans and light trucks.” But today, “non-cargo vehicles” such as “heavier models of
SUV[s], pickups, and ‘hummers’ . . . fit the category and are eligible for the tax benefit.”);
O
R. LEG. HOUSE STAFF, B-ENGROSSED, H.B. 2747 MEASURE SUMMARY, 72d Leg., Reg. Sess.
(2003), available at http://www.leg.state.or.us/searchmeas.html (noting that “some sport util-
ity vehicles, currently being manufactured, exceed 6,000 pounds gross vehicle weight and
would not be subject to the [section 280F] limitation.” The House was concerned that the
federal tax system was treating “four-wheeled vehicles with gross vehicle weight [over]
6,000 pounds” differently from passenger cars. The House’s primary concern was with
SUVs, “which do not qualify as passenger vehicles under the Internal Revenue Code because
of gross vehicle weight but are used for the same purposes as passenger vehicles.”).
131
See OR. LEG. HOUSE STAFF, A-ENGROSSED H.B. 2747 REVENUE IMPACT OF
PROPOSED LEGISLATION, 72d Leg., Reg. Sess. (2003), available at
http://www.leg.state.or.us/searmeas.html (because the “federal cost of the ‘light-truck tax
break’ is estimated between $840 million and $987 million annually,” estimating that the tax
break costs Oregon “a range between $1.9 million and $2.2 million annually”).
132
H.B. 2152, 72d Leg., Reg. Sess. (Or. 2003) (enacted).
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 693
House Bill 2152,
133
a decision that would doom to failure the proposal to close
the SUV tax loophole. This is because about three months after the governor
signed House Bill 2152 into law,
134
the secretary of state announced that a ref-
erendum petition had been completed, and that the referendum, numbered
Measure 30, was to be placed on a special election ballot for approval or rejec-
tion by Oregon voters.
135
On February 3, 2004, tax-weary voters rejected
Measure 30
136
59 percent to 41 percent.
137
Thus the Oregon State Legislature
came close—but failed—to close the SUV tax loophole at the state level.
Oregon’s failed attempt to close the SUV tax loophole can be largely at-
tributed to the provision’s merger with House Bill 2152, which, with its provi-
sions for increasing various taxes, proved to be an unpopular solution to the
state’s budget crisis.
138
It is uncertain whether the provision would have taken
such a course to demise if it had been left alone in Oregon House Bill 2747.
139
133
The Oregon House Bill 2747 provision for closure of the SUV tax loophole was in-
cluded in the enacted version of House Bill 2152 under the subheading, “Deduction and De-
preciation of Certain Vehicles.” Id. at §§ 13–19. The approach the Oregon Legislature settled
on was similar to the approach taken in California Assembly Bill 848: that the “entire
amount” of any expensing or depreciation deduction taken on the federal return for business
vehicles weighing between “6,001 and 14,000 pounds gross vehicle weight” was to be added
back to the taxpayer’s federal taxable income for the purpose of determining the taxpayer’s
Oregon income tax liability. Id. at §§ 14(1), 17(1). The final version of Oregon’s approach
excepted farming and construction businesses, and the timber or wood-products industry
from the add-back requirement. Id. at §§ 14(3), 17(3).
134
See OR. LEG. INFO. SYS., H.B. 2152 MEASURE HISTORY, 72d LEG., REG. SESS. (2003),
available at http://www.leg.state.or.us/searchmeas.html. Oregon House Bill 2152 was a
budget-balancing tax package that took Oregon lawmakers nearly eight months to pass in
what turned out to be the longest legislative session in the state’s history. James Mayer,
Oregon’s Tax Increases: A Budget-Balancing Bill Includes a Variety of Temporary and
Permanent Changes, O
REGONIAN, Sept. 25, 2003, at A10; Press Release, Ted Kulongoski,
Governor of Oregon, Statement of Governor Kulongoski Upon Signing HB2152 (Aug. 27,
2003), available at http://governor.oregon.gov/Gov/press_082703.shtml.
135
News Release, Bill Bradbury, Secretary of State, State of Oregon, Referendum Sig-
nature Verification Results (Dec. 3, 2003), available at http://www.sos.state.or.us/
elections/feb032004/verify_results_nr.pdf.
136
Oregon Ballot Measure 30 (2004).
137
Of a total of 1,172,777 votes cast in the February 3, 2004, special election, 691,462
were against Measure 30. 691,462 / 1,172,777 = .589 = 59%. E
LECTION DIVISION, OREGON
SECRETARY OF STATE, OFFICIAL RESULTS: FEBRUARY 3, 2004, SPECIAL ELECTION (2004),
available at http://www.sos.state.or.us/elections/feb032004/s04abstract.pdf.
138
The special election received great public attention. Supporters of Measure 30
thought the tax increases were fair and necessary to help Oregon meet its budgetary needs
without having to cut spending on schools, public safety, and other essential public services.
Mayer, supra note 132. Tax-weary opponents disagreed, asserting that Oregon needs “fis-
cally responsible leaders,” who will “enact greater efficiencies and do away with spending
for low-priority programs.” James Mayer & Dave Hogan, Voters Trounce Measure 30,
O
REGONIAN, Feb. 4, 2004, at A1; David Steves, Measure 30: Oregon Slams Door on Tax-
Raise Measure, R
EGISTER-GUARD (Eugene, Or.), Feb. 4, 2004, at A1.
139
Indeed, the SUV add-back provision had comprised only a small part of House Bill
2152’s revenue raising plan. It was estimated that the SUV add-back provision would raise
just $4.7 million of the $792 million that House Bill 2152 was expected to bring in addi-
tional tax revenue for the 2003-05 biennium. O
R. LEG. ASSEMB., REVENUE IMPACT
STATEMENT, H.B. 2152, 72d Leg., Reg. Sess. (2003), available at http://www.leg.state.or.us/
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694 LEWIS & CLARK LAW REVIEW [Vol. 9:3
It is clear, however, that Oregon is yet another state where legislators pushed
for the closure of a loophole that was costing the state millions in needed tax
dollars, all because section 280F no longer operates true to its originally in-
tended purpose.
Congress needs to take action to close the SUV tax loophole in section
280F. Congress must do this not only to restore the provision to its original
purpose, thereby ending abusive deduction practices that are costing the federal
and state governments millions in lost tax revenue, but also to address contem-
porary concerns regarding the heavy SUV’s impact on the environment, infra-
structure, and public safety. It is time for Congress to do what states thus far
have been unable to do.
V. MISSED OPPORTUNITIES: CONGRESS’S FAILURE TO CLOSE THE
SUV TAX LOOPHOLE IN SECTION 280F
State legislative efforts to close the SUV tax loophole have failed. Thus
far, Congress has also failed to close the SUV tax loophole, although it has had
a few opportunities to do so. First, Congress has ignored proposals to amend
section 280F to close the SUV tax loophole directly at its source. And although
recent congressional records clearly indicate Congress’s disapproval of the
SUV tax loophole, the recent changes to business tax incentives under the Jobs
Act merely narrow the loophole, and do nothing to eliminate it. There has been
much talk about closing the SUV tax loophole, but the fact remains that the
loophole still exists, and until Congress finally closes it, the loophole will con-
tinue to award greater write-offs to those who unnecessarily choose heavy
SUVs for business use.
A. Congress Has Failed to Close the SUV Tax Loophole Directly at Its Source
The source of the SUV tax loophole is the section 280F(d)(5)(A) definition
of “passenger automobile,” which excludes heavy SUVs from section 280F’s
deduction limitations. In early 2003, legislators introduced Senate Bill 265
140
and House Bill 727,
141
both entitled the “SUV Business Tax Loophole Closure
Act.” These bills proposed amending section 280F to include SUVs weighing
between 6,000 and 14,000 pounds gross vehicle weight in the passenger auto-
mobile definition,
142
so that SUVs would also be subject to deduction limita-
tions.
143
This would have eliminated the SUV tax loophole at its source. But
these proposals essentially died in committee, because Congress has taken no
searchmeas.html. Therefore, it seems that the SUV add-back provision might have stood a
better chance at becoming law if it had not been associated with a much larger, unpopular
initiative to increase taxes.
140
SUV Business Tax Loophole Closure Act, S. 265, 108th Cong. (2003).
141
SUV Business Tax Loophole Closure Act, H.R. 727, 108th Cong. (2003).
142
S. 265 at § 2(a); H.R. 727 at § 2(a).
143
Id.
DUPIC GALLEY
2005] THE SUV TAX LOOPHOLE 695
action on either of these bills since the dates of their introduction in early
2003.
144
This was a missed opportunity to close the SUV tax loophole and restore
section 280F to its original purpose. As explained by Senator Barbara Boxer,
the sponsor of Senate Bill 265, “Congress never intended the SUV tax loophole
to exist,”
145
but now that it does, “people who do not need a large vehicle for
business purposes are buying the largest Hummer SUVs, Mercedes SUVs,
BMW SUVs, and other super-sized SUVs and deducting a significant portion
of the cost from their taxes immediately.”
146
This not only goes contrary to the
original purpose of section 280F to limit the amount that small businesses may
deduct for luxury vehicles, but also, as Senator Boxer observed, this “distorts
the market, pushing up demand for the largest of all SUVs at a huge cost to the
taxpayer.”
147
For these reasons, Senator Boxer proposed restoring section 280F
to its original purpose, by making heavy SUVs subject to the same deduction
limitations as are cars, while also providing exceptions to ensure that busi-
nesses that do need larger vehicles to do their work will still get the larger
write-offs. This is exactly what Congress needs to do; unfortunately, Congress
failed to act on the 2003 bills, and currently there are no renewed efforts to
push an amendment to section 280F through Congress.
B. Changes to Business Tax Incentives Narrow, But Do Not Eliminate, the SUV
Tax Loophole
Expensing and depreciation deductions underwent more changes in 2004.
The Jobs Act extended increased expensing two more years through the end of
2007,
148
bonus depreciation expired on January 1, 2005, and Congress added a
new paragraph to section 179(b) to limit expensing deductions for heavy SUVs.
These changes have narrowed the SUV tax loophole by lessening how much
may be deducted for new purchases of heavy SUVs. Although this is some im-
provement, the fact remains that the SUV tax loophole still exists, and it con-
tinues to operate as a tax incentive to choose a heavy SUV over a passenger
automobile for business use.
The Jobs Act amended section 179(b) to add a sixth limitation on the ex-
pensing election, to restrict expensing deductions to $25,000 per year for SUVs
“not subject to section 280F” and weighing up to “14,000 pounds gross vehicle
weight.”
149
Essentially, rather than actually eliminating the loophole in section
280F by amending the definition of “passenger automobile” to include SUVs in
144
CONGRESSIONAL INFO. SERV. INC., 2003 BILL TRACKING, S.265 (2003);
C
ONGRESSIONAL INFO. SERV. INC., 2003 BILL TRACKING, H.R. 727 (2003).
145
149 CONG. REC. S1828, S1829 (2003).
146
Id.
147
Id.
148
Jobs Act, supra note 4, § 201.
149
Id., adding paragraph (6) to section 179(b). Observe that the $25,000 restriction on
expensing for heavy SUVs is equal to the pre-JGTRRA § 179(b)(1) dollar limitation on ex-
pensing, to which the Code will revert if the JGTRRA provisions for increased expensing
deductions are allowed to expire at the end of 2007.
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696 LEWIS & CLARK LAW REVIEW [Vol. 9:3
excess of 6,000 pounds, Congress left the loophole itself intact while reducing
one of the loophole’s manifestations as a tax incentive elsewhere in the Code.
This is the only form of remedial action taken by Congress toward the SUV tax
loophole. Clearly, it is quite inadequate. It is insufficient to merely lessen one
of the negative effects of a problem if the core source of the problem—here, the
outdated definition that allows heavy SUVs to elude the section 280F deduction
limitations—continues to exist.
In explaining its decision to add the new paragraph to section 179(b), the
Senate Committee on Finance identified the loophole and observed that it cre-
ated an incentive for small businesses to buy heavy SUVs for the larger write-
off, even though they were “not necessary for purposes of conducting the tax-
payer’s business.”
150
Notably, the Senate Committee on Finance expressed its
concern that such taxpayer behavior has produced “market distortions,” and the
Committee asserted that it “does not believe that the United States taxpayers
should subsidize a portion of such purchase.”
151
By failing to eliminate the
source of the SUV tax loophole problem, Congress failed to follow through on
its own concerns as expressed in the congressional record.
C. Roger Revisited: A Hypothetical That Shows the SUV Tax Loophole Still
Exists, and It Still Persuades Small Businesses to Buy Heavy SUVs
Supposing Roger did not purchase a new business vehicle in September
2004, but delayed his purchase until some time after the October 22, 2004 en-
actment of the Jobs Act, he now faces different rules for expensing and depre-
ciation deductions. The following two scenarios will show that although the tax
incentive to buy a heavy SUV has been lessened, it still exists and is still strong
enough to persuade Roger to buy the heavy SUV instead of the luxury sedan. In
the first scenario, Roger purchases his new vehicle after the enactment of the
Jobs Act, but before the end of 2004; in the second scenario, Roger makes his
purchase in 2005.
1. Scenario 1: Purchasing a New Business Vehicle in 2004 After the
Enactment of the Jobs Act
As far as expensing and depreciation deductions are concerned, if Roger
chooses to buy a $50,000 sedan in 2004, it would make no difference whether
he made his purchase before or after the enactment of the Jobs Act. This is be-
cause increased section 179 expensing and 50 percent bonus depreciation were
still applicable to passenger automobiles through the end of 2004. Of course,
nothing changes the fact that section 280F(a)(1)(A) limits expensing, bonus de-
preciation, and regular depreciation to a total first-year deduction of $10,610.
152
This is all Roger would be allowed to deduct in 2004, leaving $39,390 to de-
preciate over subsequent years using the MACRS double-declining balance
method.
153
150
S. REP. NO. 108-192, at IV.F.13 (2003).
151
Id.
152
Rev. Proc. 04-20, 2004-1 C.B. 642, at Table 2.
153
$50,000 – 10,610 = $39,390.
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2005] THE SUV TAX LOOPHOLE 697
Buying a $50,000 heavy SUV in the months following the enactment of
the Jobs Act, however, would yield a different first-year deduction than if
Roger had made his purchase earlier in 2004. After the Jobs Act, a new
$25,000 expensing limit applied to heavy SUVs not subject to the section 280F
deduction limitations.
154
Thus, although section 179 used to allow Roger an ex-
pensing deduction for the full $50,000 purchase price, under section
179(b)(6)(A), Roger may only deduct half that amount now. Roger may com-
bine his $25,000 expensing deduction with a $12,500
155
50 percent bonus de-
preciation deduction and a $2,500
156
regular depreciation deduction, for a total
first-year deduction of $40,000.
157
Although not as great as fully expensing the
SUV’s price in the year of purchase, the law as it existed in the last few months
of 2004 would still allow Roger to deduct 80 percent
158
of the $50,000 purchase
price, whereas Roger could deduct only 21 percent
159
of the sedan’s purchase
price. Since Roger’s preference is to take a greater deduction in the year of pur-
chase, deferring as much tax to later years as possible, he would choose the
heavy SUV over the sedan. This shows that despite the new limit on section
179 expensing for heavy SUVs, the SUV tax loophole still operated as a tax in-
centive to choose the heavy SUV in the last months of 2004.
2. Scenario 2: Purchasing a New Business Vehicle in 2005
Under current law, bonus depreciation no longer exists because Congress
allowed it to expire on January 1, 2005. This changes the results for both pas-
senger automobiles and heavy SUVs. Because bonus depreciation no longer
applies, the most Roger may deduct for a passenger automobile is now only
$2,960.
160
For a heavy SUV, Roger may combine a $25,000 expensing deduc-
tion with a $5,000
161
regular depreciation deduction, for a total first-year de-
duction of $30,000. Although less under current law, at $27,040,
162
the first-
year deduction for the heavy SUV is still greater than the deduction for the se-
dan. Still persuaded that the heavy SUV is the better deal, Roger finally makes
his purchase, and drives his new Mercedes SUV off the lot.
D. Recommendations for Congressional Action
Congress needs to take action to close the SUV tax loophole directly at its
source: the section 280F(d)(5)(A) definition of passenger automobile. Closure
of the loophole may be accomplished by expressly including SUVs weighing
more than 6,000 pounds gross vehicle weight in the definition, as was proposed
154
I.R.C. § 179(d)(6) (RIA 2005).
155
$50,000 – 25,000 expensing deduction = $25,000 adjusted basis. $25,000(.50) =
$12,500 50% bonus depreciation deduction. $25,000 – 12,500 = $12,500 new adjusted basis.
156
$12,500(.20) = $2,500 regular depreciation deduction.
157
$25,000 + 12,500 + 2,500 = $40,000 total deduction for year of purchase.
158
$40,000/50,000 = .80 = 80%.
159
$10,610/50,000 = .2122 = 21%.
160
Rev. Proc. 04-20, 2004-1 C.B. 642, at Table 1.
161
$50,000 – 25,000 = $25,000 adjusted basis. $25,000(.20) = $5,000 regular deprecia-
tion deduction. $25,000 – 5,000 = $20,000 adjusted basis.
162
$30,000 – 2,960 = $27,040.
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698 LEWIS & CLARK LAW REVIEW [Vol. 9:3
in Senate Bill 265 and House Bill 727, so that heavy SUVs will be subject to
the same deduction caps as are passenger automobiles. Taking this action will
remove the incentive for small businesses and self-employed individuals to
purchase heavy SUVs, the features of which are not necessary to carrying out
their work, just for the bigger tax write-off.
Congress must also take care to preserve exceptions for farmers, construc-
tion workers, timber operators, and other businesses requiring large vehicles for
their work, to accord with the original intent of section 280F that such busi-
nesses get the benefit of taking uncapped deductions for the expensive vehicles
that they need. Language like that proposed in Senate Bill 265 and House Bill
727 may be used to provide this exception from the deduction limitations.
Moreover, Congress should expressly state its intent that businesses legiti-
mately needing large vehicles may enjoy uncapped deductions, while other
businesses will be subject to the section 280F deduction limitations, no matter
what kind of luxury vehicle they buy.
VI. CONCLUSION
Closing the SUV tax loophole would restore section 280F to its original
purpose of preventing abuse of the cost recovery system by limiting how much
businesses may deduct for expensive luxury vehicles. Closing the loophole
would also be consistent with Congress’s policy choice to encourage businesses
to purchase environmentally friendly vehicles such as electric cars, as mani-
fested in the Code in the form of tripled deduction limits for such vehicles. Ad-
ditionally, closing the loophole would help alleviate budget crises by putting
more tax dollars into federal and state coffers. Motivated by both fiscal and en-
vironmental concerns, a few state legislators have already pushed for closure of
the SUV tax loophole at the state level. Although unsuccessful, these efforts
nonetheless demonstrated the need for direct Congressional action. Thus, it is
time for Congress to step forward to close the SUV tax loophole at its source,
ending the abusive deduction practices made possible by an outdated definition
and a change in consumer preferences for trendy, luxury vehicles.
