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Will 2021 Change the Business Aviation Tax Code?
“No bucks, no Buck Rogers.” This quote from The Right Stuff neatly sums up the interrelationship between business aviation and the tax code. Many years ago, Bob Dole was a Senator from the airplane-building State of Kansas. Senator Dole was a commanding presence in the Senate, particularly when it came to crafting the tax code to encourage the use of business aircraft. And his signature tax code provisions worked to keep Kansas (and other states) building airplanes. Many aircraft dealers and brokers knew or pretended to know the intricacies of aircraft deductions and often presented potential customers with spreadsheets that made it seem fiscally irresponsible not to buy a jet.
Senator Dole retired in 1996, and over time, the tax advantages of business aircraft were whittled back by Congress.
The 2017 Tax Cuts and Jobs Act did much to reverse this tax trend. 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.
How long will bonus depreciation last? The 2017 law did not change depreciation forever. The 100% bonus depreciation applies to new and used aircraft placed in service after September 27, 2017, and before January 1, 2023. Will Congress change this? There are numerous political pundits struggling to provide predictions, and their answers sound like the Magic 8-Ball: “My sources say no.” “Ask again later.”
My view is that a sweeping change to the 2017 Tax Cuts and Jobs Act is highly unlikely. President-Elect Biden’s focus has been on raising taxes on those earning more than $400,000 per year. These are typically the passengers in business aircraft. But the proposed changes have not been aimed at depreciation, but rather the plan is to raise tax rates, in particular, raising the corporate tax rate from 21% to 28%. The 2017 Tax Cuts and Jobs Act was celebrated on Wall Street for reducing the corporate tax rate from 35% to 21%.
If the new administration succeeds in raising the tax rate, then deductions take on a new importance. Biden’s plans do include a variety of ways to cap total deductions, but these do not target aircraft related deductions in particular.
However, the coming challenge to business aviation may not be in proposed tax changes. Mr. Biden is proposing to make US electricity production carbon-free by 2035 and to have the country achieve net zero emissions by the middle of the century.
Reaching “net zero” requires that any carbon emissions are balanced by absorbing an equivalent amount from the atmosphere by, for example, planting trees. For aerospace geeks, this auspicious climate goal may not be as stirring as “We choose to go to the Moon in this decade…” But it should not be ignored. Because, although these climate change aspirations may be new, they may bring with them a very old concept in taxation: Sin taxes. Depending on your viewpoint, sin taxes are puritanical politics at their worst, or just pure politics. In the early 1900s, 30 to 40% of the Federal government’s funding came from alcohol taxes. These “sin taxes” did not diminish alcohol consumption, and in fact, the income tax had to be introduced in 1913 before Prohibition could be ratified in 1919. Sin taxes don’t change behavior. They simply provide politically expedient government funding.
Fossil-burning could become the next “sin” to be taxed. It would be politically unthinkable to try to tax fossil-burning cars off the road, but sin taxes on corporate aircraft are a different question.
However, like everything else, Covid has changed the equation. The vaccines will come, but the fears will not quickly go away. The tax code has long recognized that private aviation may play a role in a comprehensive security program protecting key corporate officers from unseen threats. And unlike any other time in the history of business aviation, the necessity of protecting key individuals has taken on a new dimension. The President-Elect has made it clear that Covid is the priority in the coming months. The business jet industry has adapted quickly to Covid, and a number of companies and individuals have chartered aircraft for the first time because of Covid concerns. Climate change sin taxes on aviation might be proposed in the coming months, but they may be defeated by emphasizing the role of business aircraft in the new form of corporate security.
This article appeared in the January, 2021 issue of Business & Commercial Aviation as a Point of Law article.