Dec. 14, 2018

As 2018 comes to a close, it’s a good time to review recent tax changes that can provide significant planning opportunities for business aircraft owners and operators.

Passage of the Tax Cuts and Jobs Act in late 2017 brought about a number of changes, including 100 percent bonus depreciation on new and used qualifying property acquired and placed in service after Sept. 27, 2017.

“We are receiving a lot of calls to resolve questions before the end of the year,” said Keith Swirsky, president of GKG Law, P.C. and a member of NBAA’s Tax Committee. “To ensure you are eligible for the bonus depreciation allowance, you must be sure to comply with numerous Internal Revenue Code sections.”

For example, Swirsky cautions taxpayers to be aware of new Internal Revenue Code Section 461(l), which defines “excess business loss” and may limit a taxpayer’s eligibility to take the full bonus depreciation allowance in the current tax year.

“The excess business loss limitation rule requires the taxpayer’s accountant to be involved in the transaction to complete a mock tax return to determine if the bonus depreciation will be limited based on excess business losses,” said Swirsky.

Aircraft purchasers and their advisors should also be aware that an aircraft accepted for delivery in 2018, but for which a written binding contract was in effect prior to Sept. 28, 2017, is not eligible for 100 percent bonus depreciation under the Tax Cuts and Jobs Act. However, these transactions could be eligible for 50 percent bonus depreciation under prior law.

Another common misunderstanding relates to Internal Revenue Code Section 280(F), which generally requires that a business aircraft be used at least 50 percent of the time in a given year for “qualified business use” to qualify for bonus depreciation. However, personal use of an aircraft that is properly treated as compensation to the employee, generally is included in the qualified business use percentage. Taxpayers should note that the 280(F) test also contains a second component requiring that at least 25 percent of use not include personal use where income is imputed or where the aircraft is leased to five percent owners.

In addition, there is a potential trap for the unwary regarding business flights by five-percent owners on aircraft leased between related parties. Current IRS interpretations do not treat these flights as qualified business use because of the lease structure, regardless if the flight is for business. NBAA believes this interpretation is incorrect and has requested that IRS issue guidance that “looks-through” to the actual purpose of a flight and doesn’t disallow it simply because of the related-party lease.

Swirsky explained that placing an aircraft on a Part 135 certificate for charter use can be a strategy to increase the business use percentage, but the taxpayer should understand charter is considered passive activity – assuming the taxpayer is not a charter company.

Finally, taxpayers should understand the critical importance of detailed contemporaneous recordkeeping, including flight logs, passenger names and business purpose for flights.

“Absent records to the contrary, the IRS will consider every flight a disallowed use,” said Swirsky. “Some clients are unfamiliar with how thorough records need to be maintained. It’s an educational process with the client. Proper records are difficult to recreate after notification of an audit.”

“The Tax Cuts and Jobs Act presents significant opportunities for NBAA members considering new or pre-owned aircraft purchases and other upgrades,” said Scott O’Brien, NBAA senior director of government affairs. “However, the rules surrounding bonus depreciation are complex and require careful evaluation of numerous IRS code sections.”

Review NBAA’s bonus depreciation resources.