Dec 6, 2018
With the release of proposed regulations on 100 percent immediate expensing, which was passed as part of the Tax Cuts and Jobs Act, the IRS held a public hearing where NBAA provided testimony. Tax Committee Vice Chair John Hoover, who is a partner at Holland & Knight, testified regarding the definition of a “binding written contract,” as it pertains to the applicability of bonus depreciation.
The Tax Cuts and Jobs Act amended Internal Revenue Code § 168(k) to provide 100 percent bonus depreciation for both new and used qualifying property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023, with phase downs until 2027. To qualify, property must be placed in service after Sept. 27, 2017, and not be subject to a binding written purchase contract on that date. On the other hand, buyers holding a binding written contract to purchase an aircraft prior to a particular phase down date will have an additional year to place the aircraft in service.
Under the proposed regulations, a contract will not be viewed as binding if it provides for liquidated damages of less than 5 percent of the contract price, but it is unclear whether this rule applies only in the case of breach by the purchaser or also in the case of breach by the seller. In his testimony, Hoover explained that the proposed regulation language, “states the contract must not limit damages to a specified amount, without specifying who the limitation on damages relates to.”
“This omission has resulted in confusion as to whether a liquidated damages provision applicable to the seller in the case of the seller’s breach will cause the contract to fail to be a binding written contract,” added Hoover, urging the IRS to modify the definition by adding the words “in the case of breach by the taxpayer or a predecessor.”
NBAA previously submitted written comments to the IRS requesting further clarification that liquidated damages in the case of seller’s breach would not cause the contract to fail to qualify as a binding written contract.
Read NBAA’s comments. (PDF)
Consistent with those comments, Hoover explained that clarification is needed based on four arguments. First, the definition contains a general rule that the contract must be binding on the buyer. Second, it makes sense for the binding written contract requirement to relate to the buyer, because the intent of the taxpayer should be relevant to bonus depreciation. Third, an IRS ruling regarding similar tax provisions found that liquidated damages provisions in a binding written contract apply only to breach by the buyer. And fourth, as common in a typical aircraft purchase, the liquidated damages provisions applicable to sellers are typically limited to reimbursement of the buyer’s out-of-pocket expenses and interest on the buyer’s deposit, which would be substantially less than 5 percent of the contract price.
“As part of NBAA’s continuing efforts to seek guidance for our members on key tax reform provisions, we appreciate the opportunity to provide this testimony, and encourage the IRS and Treasury Department to clarify that for written binding contracts, the liquidated damages threshold should only apply to breach by the purchaser,” said Scott O’Brien, NBAA senior director of government affairs.
NBAA thanks Tax Committee members Alan Burnett, Glenn Hediger and John Hoover for their assistance on this effort,” added O’Brien.
International Business Aviation Council Ltd.