Many aircraft manufacturers and brokers are now urging potential customers to sign contracts for or take delivery of newly manufactured aircraft before December 31, 2012, in order to take advantage of additional first-year tax depreciation—popularly known as “50% bonus depreciation.” However, before jumping in and signing a letter of intent or purchase agreement, potential aircraft buyers should carefully calculate the actual financial benefit of bonus depreciation and understand how to fully comply with applicable IRS regulations.
Business aircraft owners have been able to take advantage of bonus depreciation on newly manufactured aircraft during the past several years. Since January 1, 2008, Section 168(k) of the Internal Revenue Code has allowed 50%, additional first-year depreciation for aircraft used for business purposes. Currently, section 168(k) allows for 50% bonus depreciation for business aircraft for which a “binding written contract” (a specially defined term) is entered into by December 31, 2012, and the aircraft is placed in service by December 31, 2012. For certain kinds of aircraft, 50% bonus depreciation may be taken in 2013 if the aircraft is placed in service in 2013, provided that the purchaser enters into a “binding written contract” in 2012.
Note that 100% bonus depreciation was only available for aircraft placed in service after September 8, 2010 and by December 31, 2011 (December 31, 2012 for “certain aircraft” and “transportation property”), provided the purchaser signed a “binding written contract” after September 8, 2010 and not later than December 31, 2011.
Every aircraft buyer should consult a knowledgeable attorney and consider the following factors before letting bonus depreciation influence a purchase decision:
- Your aircraft must be used more than 50% in business in the first year to qualify for bonus depreciation.
- If you fail to use your aircraft more than 50% in any subsequent year you are depreciating the aircraft, the IRS may recapture the benefit you received from bonus depreciation.
- Bonus depreciation is not additional depreciation, but accelerated depreciation. A business aircraft owner must still depreciate a new aircraft over its standard depreciation schedule (for business aircraft not used in commercial or contract carrying of persons or property, the 5-year MACRS accelerated schedule). The total amount of depreciation is the same, but bonus depreciation allows deductions to be moved forward into earlier years. In other words, bonus depreciation results in a higher present value of tax depreciation. However, the present value of the benefit for 50% bonus depreciation is only 1%-2% of the value of the aircraft, depending on the particular circumstances of the taxpayer.
- The prices of aircraft eligible for bonus depreciation may be higher than aircraft not eligible for bonus depreciation, limiting the economic benefit of bonus depreciation or actually making the purchase more costly than it otherwise would have been.
- If you plan to use your aircraft in Part 135 charter or otherwise in the trade or business of transporting persons or property, bonus depreciation for deliveries in 2013 may be limited to only a certain percentage of the purchase price equal to the percent of the aircraft constructed as of December 31, 2012.
- If your aircraft will be a “green” or not fully completed aircraft when taking delivery in 2012 or 2013, bonus depreciation may not be available.
- The IRS requires that the taxpayer sign a “binding written contract” before December 31, 2012 in order to qualify for bonus depreciation. However, virtually all new aircraft purchase agreements do not contain the terms and conditions necessary for them to be “binding written contracts.” You should consult a knowledgeable attorney to review and revise your purchase agreement to make the aircraft purchase eligible for bonus depreciation.
- If a “binding written contract” was entered into prior to 2008, or you took an assignment of an existing purchase agreement from another party (particularly a related party), you may not qualify for bonus depreciation.
Note that if you previously took bonus depreciation for an aircraft in a prior tax year, you should review the transaction with a knowledgeable attorney to determine whether it may be possible to amend your tax return to take advantage of higher bonus depreciation. If your aircraft purchase agreement did not meet the definition of a “written binding contract,” a 2010, 2011, or 2012 aircraft delivery may be eligible for 100% bonus depreciation instead of 50% bonus depreciation.
Please contact Kevin Austin, Nate Pietila, or Tim Austin at Aero Law Group, PLLC at +1 425 456 1800, or [email protected], [email protected], or [email protected], if you need more advice or information.
DISCLAIMER: The information contained herein has been prepared for informational purposes only and is not to be construed as legal advice or opinion. Such advice or opinion is given only after being engaged to do so with respect to the particular facts and circumstances of your matter. The information provided is accurate at the time of writing, but may require revisions or modification as circumstances change.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.