Oct. 12, 2018

NBAA recently submitted comments to the IRS on the definition of a “written binding contract” in proposed regulations relating to immediate expensing, also referred to as “bonus depreciation.”

The Notice of Proposed Rulemaking followed passage of the Tax Cuts and Jobs Act, signed into law on Dec. 22, 2017, which amended Internal Revenue Code § 168(k) to provide 100 percent bonus depreciation of 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. Review the Notice of Proposed Rulemaking.

Under both the current and proposed immediate expensing regulations, there is a possibility that a contract might not be viewed as a written binding contract if it provides for liquidated damages of less than 5 percent of the contract price in the case of breach by the purchaser or by the seller. To qualify for bonus depreciation treatment, the contract must be a written binding contract.

In its comments, NBAA requested guidance that the required threshold for liquidated damages apply only to the purchaser. Since the purchaser is the taxpayer claiming bonus depreciation, the language limiting damages to a specified amount should only be applicable to purchasers. Because purchasers, unlike sellers, usually incur only minimal actual damages for out-of-pocket expenses, applying liquidated damages of 5 percent of the contract price upon seller’s default would likely be deemed void as a penalty.

For this reason, a 5 percent liquidated damages threshold upon seller’s breach could prevent nearly all new aircraft purchases, and many pre-owned aircraft purchases, from qualifying as written binding contracts.

“From a policy perspective, the determination of what constitutes a written binding contract should be based on the commitment of the taxpayer claiming bonus depreciation to the expenses and liabilities under the contract,” said Scott O’Brien, NBAA senior director, government affairs. “So long as that taxpayer is obligated to pay a sufficient amount of damages in case of default, the contract should be viewed as binding.”

While NBAA was generally pleased with the proposed regulations, especially the clarification of how “previously used” property qualifies for bonus depreciation, the requested clarification on written binding contracts is important. In the coming months, NBAA will continue to follow-up with the IRS and Department of the Treasury on this issue as the rulemaking progresses.

NBAA Tax Committee members Alan Burnett, founding partner of CenterPoint Aviation Law PLLC; Glenn Hediger, CPA and president of Aviation Financial Consulting, LLC; and John Hoover, partner at Holland & Knight LLP directly contributed to NBAA’s comments.

Review NBAA’s comments