Under the Tax Cuts and Jobs Act of 2017, Congress introduced 100% bonus depreciation for pre-owned aircraft purchased for use in a “trade or business.” (Previously, bonus depreciation was available only for aircraft delivered new from the manufacturer.) The bonus depreciation percentage phases out over several years, decreasing in yearly 20-percentage-point chunks (80%-60%-40%, 20%) before disappearing permanently. A careful reading of the law reveals that some aircraft placed in service in calendar year 2023 may be eligible for 100% bonus depreciation, not just aircraft placed in service in 2022.
Under Internal Revenue Code section 168(k)(6)(B)(i), so-called “certain aircraft” qualify for 100% bonus depreciation if they were placed in service in a trade or business after September 27, 2017 and before January 1, 2024. There are a number of requirements to meet the definition of “certain aircraft.”
First, the taxpayer previously could not have had a “depreciable interest” in the aircraft during the five previous calendar years (not counting property placed in service and then disposed of to an unrelated party within 90 days after). Second, the taxpayer cannot have acquired the aircraft from a related party, or in a transaction where the basis is carried over from the transferor or determined with reference to other property held by the acquiring taxpayer. Third, the aircraft cannot be “transportation property,” which is property “used in the trade or business of transporting persons or property.” (However, it’s unclear whether leasing the aircraft to a Part 135 charter company constitutes such use, or whether less than predominant use in Part 135 charter would result in the aircraft being considered “transportation property.”) Fourth, at time of contract, the taxpayer must make a nonrefundable deposit of $100,000 or ten percent of the cost (whichever is less). Fifth, the aircraft must have a cost of more than $200,000 and an estimated production period of more than four months.
As long as all requirements for “certain aircraft” are met, an aircraft placed in service in 2023 would qualify for 100% bonus depreciation. Also, there is no requirement that a taxpayer enter into a binding written in 2022 for an aircraft delivering in 2023. Also, a taxpayer can take an aircraft already owned for non-business use and convert it to business use and qualify for bonus depreciation, provided the other requirements for “certain aircraft” are met.
Note that bonus depreciation is not available to aircraft used in certain trades or businesses (such as auto or equipment dealers using floor-plan financing, or electrical, water or sewage utilities).
Bonus depreciation can result in a large up-front tax deduction in the year of purchase. However, there are many other considerations to keep in mind. Don’t single-mindedly chase bonus depreciation or just assume that it’s actually going to make a difference on your tax return. Each taxpayer’s situation is different, so consult a knowledgeable aviation tax attorney or accountant to make sure you’re accounting for all the variables.