Throughout the recent American presidential election season, the one thing Romney and Obama agreed on was broadening the income tax base by paring deductions available for tax incentives favoring the “wealthy.” In the case of business aircraft, one such incentive would appear to be accelerated depreciation, which allows the acquisition cost be recovered over as few as 5 years, including 20% in Year 1 and 32% in Year 2. Commercial aircraft may be depreciated over 7 years.
In providing accelerated depreciation for aircraft, Congress’ primary goal is to subsidize the highly capital intensive, and marginally profitable, commercial aviation industry. Accelerated depreciation for business aircraft is justified owing to the considerable overlap between commercial and business aviation among manufacturers, service providers and other vendors.
In the wake of the September 2001 terrorist attacks on the US and the swoon among airline stocks and the US economy generally, in 2002 Congress enacted “Bonus Depreciation,” allowing purchasers of new aircraft to deduct 30% of the purchase price in Year 1, and to claim depreciation at the normal accelerated rate on the remaining 70% of the purchase price. For business aircraft depreciable over 5 years, the depreciation deduction in Year 1 would be up to 44%, including the 30% Bonus Depreciation plus 20% of the remaining 70% of the purchase price. In Year 2, the depreciation deduction would be up to 22.4% (= 32% of 70%), and so forth.
Bonus Depreciation was increased to 50% in 2003. In 2010, Bonus Depreciation was increased to 100% for aircraft placed in service before 2011, with 50% Bonus Depreciation available for “Certain Aircraft” and for “Long Production Period Property” placed in service in 2012. The 100% and 50% rules from 2010 were extended to 2012 and 2013, respectively.
In what many have labeled a class warfare agenda, Obama has made no secret of his disdain for “corporate jets” and their owners and users. Buoyed by his reelection and stating, even if not believing, that we was returned to Washington to “raise taxes on the rich,” Obama was expected to do just that in the highly contentious “Fiscal Cliff” battle, which ended on January 2, 2013. Editorially, had Obama truly been elected to raise taxes on the rich, the electorate would not have returned a Republican majority in the House of Representatives, which is sure to fight Obama at every turn on increasing taxes.
Nevertheless, by the end of the battle, Obama was successful in raising marginal rates for “wealthy” taxpayers earning over $400,000 ($450,000 for married couples). However, to the surprise of many, and to the great chagrin of the most ardent class warfare warriors, 50% Bonus Depreciation was extended for new business aircraft placed in service in 2013, and through 2014 for “Certain Aircraft” and for “Long Production Period Property” for which the purchase contract is entered into before 2014.
The term “Certain Aircraft” refers to aircraft: (a) that are not “Transportation Property”; (b) on which the purchaser, at the time of the contract for purchase, makes a nonrefundable deposit of the lesser of 10% of the purchase price or $100,000; (c) that has an estimated production period exceeding four (4) months; and (d) that costs more than $200,000.
The statute (Internal Revenue Code Section 168(k)(2)(B)(iii)) defines “Transportation Property” simply as “tangible personal property used in the trade or business of transporting persons or property.” There is no definitive guidance from the IRS further clarifying the definition. It is possible that the IRS would interpret the definition of Transportation Property with reference to the taxpayer’s business, such that the aircraft must be used by taxpayers (or perhaps their lessees?) whose primary business is commercial air transport. It is also possible the IRS would define Transportation Property not solely or at all with reference to the nature of the taxpayer’s (or lessee’s) business, but with reference to how the aircraft is actually used. The term “trade or business” connotes a profit motive. Under the latter interpretation of Transportation Property, the question is begged whether, even if the taxpayer’s primary business is not commercial air transport, is the “trade or business” test met with one for-profit flight, or must the aircraft be used predominately (e.g., greater than 50%, or at some other level) to transport persons of property for profit.
LPPP is property costing more than $1,000,000 which takes longer than 1 year to produce, and which is 10-year or longer property (business aircraft are either 5-year or 7-year property) or otherwise is Transportation Property. Whether the particular aircraft tokes longer than 1 year to complete can be determined. However, assuming the aircraft meets the LPPP definition, only the amount expended for production before 2014 would be entitled to the 50% Bonus Depreciation. This limitation does not apply to Certain Aircraft.
Finally, in order to qualify for Bonus Depreciation, the aircraft must qualify for accelerated MACRS depreciation, rather than under the straight-line method of the Alternate Depreciation System (“ADS”). The rules to determine eligibility for accelerated MACRS are fairly complicated. In summary, aircraft used predominantly outside of the U.S. or aircraft used predominantly for non-business purposes must use ADS.
Given the high stakes of the potential tax savings of business aircraft ownership, and the omnipresent aviation regulatory and liability limitation issues attending the establishment of an optimal ownership and operating platform, these matters should be considered with the assistance of a business aviation tax professional capable of efficiently addressing them on a comprehensive and integrated basis.[/ismember]