Bonus Deprecation Redux

Post Category: Jet Talk

Will Congress restart the bonus depreciation clock?  Hill watchers are hopeful.  The House passed the “Tax Relief for American Families and Workers Act” on January 31st by a vote of 357-70.  Senate Majority Leader Chuck Schumer has expressed support for the bill.  The Senate Finance Committee recommended extending 100% bonus depreciation for aircraft through the end of 2025 (through the end of 2026 for longer production new aircraft).

The 2017 Tax Cuts and Jobs Act helped create the current seller’s market for corporate aircraft.  Before the 2017 changes, “bonus depreciation” gave the buyers of new aircraft the ability to deduct 50% of the aircraft’s cost in the first year.  With the 2017 changes, even a buyer of a used aircraft could deduct 100% of the cost of the aircraft in the first year.

2017 Tax Cuts and Jobs Act Built-In Phaseout

However, the 2017 law did not change depreciation forever.  It was designed with a built-in phaseout.  The 100% bonus depreciation applied to new and used aircraft placed in service after September 27, 2017, and before January 1, 2023.  The purchase of most, but not all, new aircraft would still qualify if placed in service prior to January 1, 2024, and not primarily used by an air carrier or other commercial service.  A new aircraft to be used primarily in commercial service will only qualify for 100% bonus depreciation in 2023 if the aircraft has an estimated production period exceeding one year and costs more than a million dollars.

An aircraft placed in service in 2023 was eligible for 80 percent bonus deprecation, in 2024 will be eligible for 60 percent bonus deprecation, and so on.

Beginning in 2023, the applicable percentage for bonus depreciation phased down by 20 percent per year. Therefore, under the general rule, an aircraft placed in service in 2023 was eligible for 80 percent bonus depreciation, in 2024 will be eligible for 60 percent bonus depreciation, and so on.

The purchase of new aircraft that meet the requirements for bonus depreciation during 2023 was phased down by 20 percent per year as well, but on a one-year delay.  So, if such an aircraft is placed in service in 2024, the purchase will be eligible for 80 percent bonus depreciation, 60 percent in 2025, and so on.

Without the like-kind exchange rules, if you have owned an aircraft for seven years, taken your deprecation deductions until the tax valued $0, and sold it for a million dollars, you will owe taxes on a million dollars worth of gain.

A Proposed Extension of Bonus Deprecation

Without the like-kind exchange rules, if you have owned an aircraft for seven years, taken your deprecation deductions until the tax valued $0, and sold it for a million dollars, you will owe taxes on a million dollars worth of gain.

The proposed legislation extends 100% Bonus Depreciation, but, it does not propose the gentle phase-down from the current law.  Instead, the new provision drops to 20% bonus depreciation for property placed in service after December 31, 2025, and before January 1, 2027 (after December 31, 2026, and before January 1, 2028, for longer production period property and certain aircraft).

There was another key provision in the 2017 tax bill that will have an effect if and when bonus depreciation goes away.  We lost the like-kind exchange rules.  Typically, the IRS looks on any sale or “exchange” of goods as a taxable event.  For years, aircraft owners were allowed to take advantage of the “like-kind exchange” rules of IRC § 1031.  By utilizing a like-kind exchange, no gain or loss would be recognized.  Without the like-kind exchange rules, if you have owned an aircraft for seven years, taken your depreciation deductions until the tax value reached $0, then if you sold it for a million dollars, you will owe tax on a million dollars’ worth of gain (profit).  With the old like-kind exchange rules, if you replaced the aircraft, then you didn’t owe tax on the sale of the aircraft that was replaced.

Selling vs. Purchasing Difference

With bonus depreciation, if you sell your old airplane for a million dollars, and it was fully depreciated, then you had a million dollars’ worth of taxable gain.  But, if you bought a “new-to-you” aircraft for two million dollars, you had two million dollars’ worth of “loss” to offset the gain.  As the bonus depreciation percentages begin to decrease, taxpayers will begin to really miss the days of the like-kind exchange.

“No bucks, no Buck Rogers.”  This quote from The Right Stuff neatly sums up the interrelationship between business aviation and the tax code.  If you plan to buy an aircraft for business, don’t leave any detail to chance.  Work with your tax professionals before the purchase to make sure that the process produces the expected tax savings.

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