Incenting Behavior: Spend Mgmt. Learning From an Automotive Purchase and IRS Section 179 (Part 1)

In the past few weeks, my wife and I finally decided it was time to buy a car for our business. The old minivan, which has had double family and work duty for four years, will continue to menace the streets of Chicago as it tears up the local pavement, spilling cheerios and leaking kiddie bodily fluids on our potholed streets (see the post: Friday Rant: Don't Buy My Used Minivan -- Spend Management's Limits on why never to buy this thing from us). This realization of needing a new work vehicle has led to countless nights of wasted vacation (and post-vacation) time reading reports and watching You Tube video reviews (I'm partial to Top Gear and especially loved this review that helped us rule out a used BMW X6) as we once again come up to speed on what's possible to buy if the kids won't be riding in the thing.

In the process of getting smart on cars during our vacation, it became apparent to us that the car we wanted to buy won't, in fact, be a car. In other words, the used 4 door Acura, Audi or what have you doesn't make economic sense for a reason I'll get to in a minute. Nor does the other suggestion I initially tossed out to my wife, the Chevy Volt. Even though the EV comes courtesy of Government Motors, I find the fully electric Volt intriguing and a great middle finger to oppressive oil producing nations (I don't care about green -- I care about energy independence). All things being equal, the Volt is the car I'd most like to own, especially if we could find a creative way to, well, freely tap power from our parking garage (no comment on the schematics I worked out on this one already).

Yet as business owners, we won't be buying the Volt. It turns out that our government still wants us to buy a thirsty SUV. We thought this crazy provision was phased out years ago, yet today, as Lisa wrote over on MetalMiner, "the IRS 179 deduction provides for a $25,000 initial first year deduction, if your business purchases a vehicle that has a gross vehicle weight of 6,000 pounds." Lisa did an analysis, which in retrospect is slightly incorrect (more on that later), which makes the SUV even more affordable that her analysis relative to the Volt. Consider Lisa's comparison of our effective total cost of the Volt vs. the VW Touareg, a performance-focused SUV. According to Lisa, the VW can be had for roughly the same price ($41K) as the Volt.

This is how they compare: "Let's say at $41,000 (and I don't add any options, again not likely), I get to deduct $25K from the $41K price tag off the bat [for the VW], reducing our business' tax liability significantly. In other words, our effective post tax liability is roughly $16K in the first year, of which we can depreciate entirely in the coming years. Did I mention the gas mileage on the Touareg? It's a measly 14 in the city and 19 mpg on the highway. However, I don't need to make a TCO (total cost of ownership decision) because this is my business car and I'm only using it for business meetings (meaning it will get relatively low mileage)."

Actually, Lisa is slightly incorrect, as I hinted at. We later learned that you can also immediately depreciate 20% of the difference in the first year between the purchase price and the special 179 SUV exemption ($3,200 in this case). So in other words, if we purchase the VW vehicle, whose five-year gasoline costs lets some Saudi Prince buy another falcon to play with, we're left with less than $13K left to depreciate over the remaining four years in the vehicle's useful life (i.e., we can immediately wipe $28K off our top line before it impacts our corporate/personal taxes). Compare that with the Volt, which would leave us with less than a $20K initial write-off on the business, since it does not qualify for the SUV expensing treatment!

I hope the irony of this situation is not lost on all the US residents and citizens in the Spend Matters audience. Yet the purpose of this rant is not to question absurdist policy. I actually think there are a number of lessons I've learned throughout this escapade -- or should I say Escalade -- that apply to how we incent demand and behavior within our own organizations once we've contracted with suppliers. After all, while procurement policy may never be as influential as government policy, it can most certainly guide buying behavior. Stay tuned for Part 2 of this post, where we'll analyze some of these key takeaways.

Jason Busch

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