Aircraft that are owned and operated by businesses are often depreciable for income tax purposes under the Modified Accelerated Cost Recovery System (MACRS). Under MACRS, taxpayers are allowed to accelerate the depreciation of assets by taking a greater percentage of the deductions during the first few years of the applicable recovery period. In certain cases, aircraft may not qualify under the MACRS system and must be depreciated under the less favorable Alternative Depreciation System (ADS).
Generally, to be eligible for accelerated or bonus depreciation, a business aircraft must be used at least 50 Percent for business purposes. This “50 Percent Test” under § 280F of the Internal Revenue Code is complex, and NBAA has a detailed analysis of the issue.
Under ADS, depreciation is based on a straight-line method meaning that equal deductions are taken during each year of the applicable recovery period. In most cases, recovery periods under ADS are longer than recovery periods available under MACRS.
There a variety of factors that taxpayers must consider in determining if an aircraft may be depreciated, and if so, the correct depreciation method and recovery period that should be utilized. For example, aircraft used in commercial service (i.e. FAR Part 135) are normally depreciated under MACRS over a seven year recovery period or under ADS using a twelve year recovery period.
Aircraft used for qualified business purposes, such as FAR Part 91 business use flights, are generally depreciated under MACRS over a period of five years or by using ADS with a six year recovery period. There are certain uses of the aircraft, such as non-business flights, that may have an impact on the allowable depreciation deduction available in a given year. With this in mind, operators are encouraged to review the resources on this page and work with qualified aviation tax and legal counsel to determine the best approach for depreciating business aircraft.