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Big SUVs' tax break roars past hybrids'

Associated Press
Published February 19, 2006

New tax breaks are available to anyone who wants to help the environment by purchasing fuel-efficient hybrid vehicles. But if owners of small businesses really want to save money, they can get even bigger federal tax breaks by buying the largest gas-guzzling sport utility vehicles.

The disparity is drawing criticism from environmentalists and the Republican chairman of the Senate's tax-writing committee, who is working on a change. Dealers and owners who have benefited from the SUV tax incentive say it helps spur a key part of the economy - automaking - and allows small-business owners to purchase vehicles that improve their bottom line.

Federal tax rules that took effect last month allow a credit of up to $3,150 for anyone buying a hybrid car. The credit is the same regardless of tax bracket.

However, owners of small businesses who buy a Hummer, Ford Excursion or other SUV weighing more than 3 tons get a deduction of up to $25,000 - depending on tax bracket - if they use the vehicle exclusively for work.

The benefits don't stop there. Once they subtract the $25,000 from the cost of their 3-ton SUV, small-business owners can deduct the depreciation on the remaining amount. Someone who bought a $60,000 SUV, for example, can claim the remaining $35,000 over six years.

No such luck for small-business owners who buy cars weighing less than 3 tons. No matter how much the vehicles cost, they can claim just $15,535 in depreciation over six years and $1,675 each additional year. Deductions for depreciation on trucks and vans weighing less than 3 tons are slightly more generous.

Senate Finance Committee Chairman Chuck Grassley, R-Iowa, is working on a bill that would level the playing field between SUVs and hybrids.

"It's inconsistent for the tax code to encourage business people to buy heavy SUVs and not alternative vehicles," said Grassley, whose committee has oversight of tax legislation. "As consumer demand for alternative energy products increases, it's important for the tax code to be consistent."

A Grassley aide declined to describe the legislation in detail, saying more information will be released in coming weeks.

Dan Becker, head of the Sierra Club's global warming program, said the SUV tax break flies in the face of President Bush's State of the Union call for less reliance on oil.

"The president is right that we're addicted to oil, so we should break the addiction by urging Americans to buy hybrids, not Hummers," Becker said.

The Alliance of Automobile Manufacturers declined to comment beyond saying the group is satisfied with current tax policy.

Nashville real estate agent Cindy Jasper said the deduction has boosted her small business. She uses two Hummer H2s to take clients to rugged farm and equestrian properties. "It's just such a great marketing vehicle," she said. The tax breaks for large SUVs are rooted in long-standing deductions for small-business purchases, including trucks and vans for farmers, contractors and others who need heavy vehicles. Trying to jump-start the economy after the terrorist attacks of Sept. 11, 2001, Congress increased the deduction for small businesses from $25,000 to $100,000 for 2003 and most of 2004. However, lawyers, doctors and others also took advantage of the measure.

[Last modified February 19, 2006, 01:10:11]

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