April 26, 2023
Business aircraft operators often have questions about obtaining maximum financial benefits from aircraft depreciation without running afoul of FAA and IRS regulations.
“There are many inaccurate narratives out there,” said David Shannon, with Lewis Brisbois Bisgaard & Smith LLP, a co-presenter of the session, “Aircraft Depreciation Gray Areas: 100% Bonus Is Going Away, So Now What?” at the upcoming NBAA Business Aviation Tax Seminar taking place June 8 in Chicago, IL.
Bonus depreciation on an aircraft purchase is an outgrowth of the modified accelerated cost recovery system that allows owners to claim accelerated depreciation deductions on aircraft used for business purposes over six years.
Following the 9/11 attacks, Congress enacted the ability to claim additional bonus depreciation immediately in the year that the aircraft is placed in service to help stimulate the economy. It was most recently renewed in the 2017 Tax Cuts & Jobs Act, which allowed for a 100% bonus depreciation deduction for new and used aircraft.
However, 2023 marks the beginning of a gradual scaling down of the bonus depreciation percentage, from 80% this year to zero after 2026. To qualify, the aircraft must have been operated for a clear, documented business purpose when claiming its depreciation against a company’s tax obligation; personal use does not qualify.
“People often just don’t understand that,” said session co-presenter Chris Younger, with Crowell & Moring LLP. “That always makes me scratch my head. How did you think you’re getting a [business] deduction for a personal use asset?”
Those claiming accelerated depreciation must demonstrate at least 50% qualified business use. However, with proper tax planning, Shannon noted there are opportunities to take accelerated depreciation with more than 50% personal use.
“Tax planning is essential for any aircraft purchase,” he said. “You need to make sure you are structured for the maximum impact of the deductions you are planning to utilize.”
With the phase out of bonus depreciation, “the whole conversation is changing,” Younger added, “because you have leftover depreciation to manage that you didn’t have when deducting 100%. Managing both the bonus depreciation deduction and the remaining depreciation deductions in subsequent years can be challenging.”
Operators should weigh the pros and cons of taking the maximum depreciation up front. “Model it out to determine if the bonus depreciation is worth the added complications,” Younger said. “And it’s also a timing issue – if you sell the aircraft down the road, you’ll have recaptured gain [income] from the purchase.”
Shannon also urged a cautious approach. “Owners and operators must know what to do and how to do it properly,” he said. “The reality is, three years from now, you might be in front of one of those 87,000 new IRS agents during an audit.
“All your documentation must be perfect,” Shannon concluded, “and the burden of deductibility of expenses is on the taxpayer, not the IRS.”