[ QUOTE ]
The original purpose was to give farmers a tax break. Illustrates well the "Law of Unintended Consequences".
Patrick
[/ QUOTE ]
While that's what the article says, it's only one target for the loop-hole. The real issue is that the definition of a "luxury vehicle" for tax purposes, is simply any four-wheeld vehicle that weighs less than 6,000#. This was set-up to keep business owners from buying expensive luxury cars and getting accelerated depreciation like you would any other 5-year asset (heavy truck, computer, etc.). This is hardly anything new, it's just getting to where there are so many luxury trucks/suvs that exceed 6,000# limit it's becoming more understood. Suburbans and 3/4 ton truck have always fallen into this same classification since it was put in place years ago.
The extra "one-time write-off" known as section 179 is also nothing new. This has applied to all business assets for many years, but it does not apply to "luxury vehicles" as defined above. Section 179 goes up $1,000 or so every year but was given a little extra boost in 2001. Even if you have a vehicle that is not a "luxury vehicle" that qualifies for this accelerated depreciation, it must be used more than 50% for business. Also, what some folks don't understand is that even though you can take all this accelerated depreciation, you're still subject to capital gains tax when/if you sell the vehicle. Here's an example:
Joe Blow buys an H-2 and pays $50,000. He used the vehicle 100% for business and has no other assets purchased during the year. He accelerates the depreciation the first year and over the course of three years he deducts a total of $40,000. In the third year he sells the H-2 for $25,000, which would create a taxable gain of $15,000. So now he must repay the tax on $15,000 of his initial deduction. IN essence he really only received $25,000 in deductions which happens to equal the actual depreciation of the vehicle. The only advantage is he saved the money up-front. I agree the tax laws need some adjusting, but this isn't exactly as big of a "loop-hole" as it may seem.
As for the tax credit, a tax credit is much more valuable than a deduction. You'd get about a $2,000 credit for a Prius. Assuming you're in the 30% tax bracket for 2003, that $2,000 credit is equal to a $6500 deduction and any individual can take this (no business use required) and there is no recapture or capital gains to be associated with this credit. The alternative fuel credit is a completely different animal than the depreciation/section 179 deductions and isn't even worth comparing. One applies to business, one individuals. One is a deduction based on depreciation, the other a straight tax credit.