The 2017 Tax Cuts and Jobs Act helped create the current seller’s market for corporate aircraft. It allowed buyers of both new and used aircraft to deduct 100% of an aircraft’s cost in the first year. Before the 2017 act, “bonus depreciation” gave buyers of new aircraft the ability to deduct 50% of the aircraft’s cost in the first year.
How long will bonus depreciation last? The 2017 law did not change depreciation forever.
The 100% bonus depreciation applies to new and used aircraft placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The purchase of most, but not all, new aircraft will still qualify if placed in service prior to Jan. 1, 2024, and not primarily used by an air carrier or other commercial service. A new aircraft to be used primarily in commercial service will only qualify for 100% bonus depreciation in 2023 if the aircraft has an estimated production period exceeding one year and costs more than $1 million dollars.
Beginning in 2023, the applicable percentage for bonus depreciation will be phased down by 20% per year. Therefore, under the general rule, an aircraft placed in service in 2023 will be eligible for 80% bonus depreciation, in 2024 will be eligible for 60% bonus depreciation, and so on.
The purchase of new aircraft that meet the requirements for bonus depreciation during 2023 will be phased down by 20% per year as well, but on a one-year delay. So, if such an aircraft is placed in service in 2024, the purchase will be eligible for 80% bonus depreciation, 60% in 2025, and so on.
Will Congress change this? There are numerous political pundits struggling to provide predictions, and their answers sound like the Magic 8-Ball: “My sources say no.” “Ask again later.”
There was another key provision in the 2017 tax bill that will have an effect beginning in 2023. We lost the like-kind exchange rules.
Typically, the IRS looks on any sale or “exchange” of goods as a taxable event. For years, aircraft owners were allowed to take advantage of the “like-kind exchange” rules of IRC § 1031. By utilizing a like-kind exchange, no gain or loss would be recognized. Without the like-kind exchange rules, if you have owned an aircraft for seven years, took your depreciation deductions until the tax value reached $0, then if you sold it for $1 million dollars, you would owe tax on $1 million dollars’ worth of gain (profit). With the old like-kind exchange rules, if you replaced the aircraft, then you didn’t owe tax on the sale of the aircraft that was replaced.
From 2018 through the end of 2022, if you sold your old airplane for $1 million dollars and it was fully depreciated, then you had $1 million dollars’ worth of taxable gain. But, if you bought a “new-to-you” aircraft for $2 million dollars, you had $2 million dollars’ worth of “loss” to offset the gain. As the bonus depreciation percentages begin to decrease, taxpayers will begin to really miss the days of the like-kind exchange.
And so, the strong sellers’ market for corporate aircraft will be pressed by the need to place an aircraft in service before New Year’s Eve.
Please note that buying the aircraft before the end of 2022 is not enough. The aircraft must be “placed in service” this year. IRS regulation states that “[p]roperty is first placed in service when first placed in a condition or state of readiness and availability for a specifically assigned function.”
The IRS has often battled with taxpayers over the details of whether an aircraft was properly placed in service before year-end. The IRS has carefully probed whether a claimed flight was truly business. Tax court decisions often delve into details with the vigor of a murder investigation, using time-stamps on fuel receipts to disprove witness statements regarding the length of alleged business meetings.
The IRS also has battled taxpayers on whether the aircraft was available for its “specifically assigned function” when, after purchasing the aircraft and performing some “placed in service” flights before the end of the year, the taxpayer then has modifications made to the aircraft, such as the addition of a conference table. In one tax court case, the court determined that the taxpayer had determined that a conference table must be installed in the aircraft to conduct sales meetings in flight. Because the conference table had not been installed before year end, the court concluded that the aircraft had not been placed in service before year end. The repercussion was that there would be no depreciation deduction in the year the aircraft was purchased, and the depreciation available would be based on the following year.
Therefore, if you buy a used corporate jet this year, fly it on business before the end of the year, but then add substantial modifications to the aircraft next year, you run the risk of not only pushing the deductions from 2022 to 2023, but also reducing your bonus depreciation from 100% to 80%.
“No bucks, no Buck Rogers.” This quote from The Right Stuff neatly sums up the interrelationship between business aviation and the tax code. If you plan to buy an aircraft for business, don’t leave any detail to chance. Work with your tax professionals before the purchase to make sure that the process produces the expected tax savings.
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