US tax reform bill threatens aircraft sales
Aviation transaction specialist Jeffrey Towers is warning of “negative implications for the US aviation market” if politicians make it harder to buy corporate jets.
Reforms to the US tax code are currently going through Congress, with alternatives being offered by members of both the House of Representatives and the Senate. Both versions of the tax reform bill would eliminate the current ability to defer paying tax on the sale of a business aircraft, and neither of them contain provisions for used aircraft.
Towers is urging members of the US business aviation industry to lobby their political representatives, to try to ensure that it does not lose out when Congress makes it final decision on the bill’s content next week. If it is approved then, the bill will take effect on 1 January 2018.
He says that, if the bill does not either preserve the ability to defer tax payment (known as 1031 exchanges) or extend proposed 100% bonus depreciation deductions for new aircraft to used ones, the effect of potential buyers having less money available will be felt across business aviation in the US and around the world.
Section 1031 exchanges allow US taxpayers to defer the tax that results from the sale of a depreciated asset, provided that the owner replaces the asset. Forward exchanges are used when the sale precedes the purchase and reverse exchanges are used when a purchase precedes a sale. The process must be strictly followed or the exchange is invalid.
“Under the bill as currently drafted… at each step in the chain of transactions, the potential buyer will have less net cash with which to purchase the asset that best suits the needs of its business. The negative ripple effect all the way up to the business that intends to buy the newly-manufactured asset is obvious,” he said.
“Since the US is currently leading the way toward the recovery of the global aircraft market, a setback in the US could have negative connotations worldwide.”
The tax reform bill provides for 100% depreciation deductions for newly-manufactured equipment – not just corporate jets – which will allow a business buying a brand new aircraft to write off the entire purchase price against its taxable income in that year.
“Preserving 1031 exchanges is not adding anything new to the tax code, but rather is merely keeping the healthy status quo for transactions involving the purchase of used aircraft and equipment. Extending bonus depreciation for new purchases and continuing to allow 1031s for used purchases would foster the continued growth of the aircraft and equipment industries.”
The House version of the bill proposed to expand 100% expensing to include purchases of used equipment, but the proposal was rejected by the Senate.
“The Senate presumably found that the costs associated with throwing used purchases into the mix outweighed the potential benefits,” said Towers, general counsel at TVPX, which provides 1031 exchanges and FAA owner trust services.
Towers wants Congress to continue to allow 1031 exchanges on aircraft that are not subject to 100% bonus depreciation, because the “vast majority” of aircraft purchases are made by people who are selling an old aircraft and moving up to a newer – but not brand new – aircraft. If the approach is abolished, potential purchasers would have to put a certain amount of money from the sale of their existing aircraft aside to pay tax immediately – reducing the amount they have available to buy a replacement.
“Aircraft transactions are interconnected – a business that is buying an aircraft is most likely selling the one they currently have,” he said. “Under the current rules for 1031, when they sell their old aircraft they can reinvest all of the proceeds into their new aircraft. This is possible because… the obligation to pay the tax on the depreciation recapture is deferred, and the tax basis in the replacement asset is adjusted downward in an amount equal to the deferral.
“Under the bill as currently drafted, beginning 1 January 2018, the business would now need to effectively reserve from the sale proceeds an amount sufficient to pay their federal and state income tax arising from the sale.”
He urged people to contact their representatives and senators, to ask them to address the issue before Congress passes the complete bill to the US president for signing.
TVPX has been working with the National Business Aviation Association and spoke to Senator Jim Inhofe about the issue. Inhofe subsequently drew up an amendment to the Senate bill that would preserve 1031 exchanges, but it was not adopted. Towers and his colleagues met Congressman Rob Bishop earlier this week, to gain his support.
“Preserving 1031 exchanges is not adding anything new to the tax code, but rather is merely keeping the healthy status quo for transactions involving the purchase of used aircraft and equipment. Extending bonus depreciation for new purchases and continuing to allow 1031s for used purchases would foster the continued growth of the aircraft and equipment industries,” Towers added.
“Part of our concern is obvious, since we’re in the business of doing 1031 exchanges, but this is important for us and important for the rest of the industry. The tax reform package is intended to create incentives for additional investment in the economy. That’s all well and good but if, in the process of doing that, part of the aviation transaction marketplace is ignoring the used transactions that far outnumber the new transactions, that won’t happen. It’s all part of the same ecosystem and it all has to work together.
“If we’re going to try to encourage the economy and encourage growth, we need to look at the entire marketplace, including the used marketplace.”