Pushed by President Bush for legislation intended to stimulate the nation’s economy, Congress has taken action on two bills that may affect the purchase of new aircraft by boosting depreciation deductions. While the bills use the term “qualified property” as eligible for depreciation deductions, new aircraft could possibly fit that definition.
At press time, H.R.3090, the Economic Security and Recovery Act of 2001, sponsored by Rep. William Thomas (R-Calif.), would provide for a special depreciation allowance for certain property acquired after Sept. 10, 2001, and before Sept. 11, 2003. On October 12, the House Ways and Means Committee voted its approval of the $100 billion total package and moved the bill forward.
Under the “business provisions” of the bill the language reads:
“(1) Additional allowance–In the case of any qualified property:
(A) the depreciation deduction provided by section 167(a) for the taxable year in which such property is placed in service shall include an allowance equal to 30 percent of the adjusted basis of the qualified property, and
(B) the adjusted basis of the qualified property shall be reduced by the amount of such deduction before computing the amount otherwise allowable as a depreciation under this chapter for such taxable year and any subsequent taxable year.”
Qualified property is defined as property that has a recovery period of 20 years or less, a water utility property or computer software, and the original use of which commences with the taxpayer after this past September 10. The property would have to be acquired by the taxpayer after that date and before Sept. 11, 2003, but only if no written binding contract for the acquisition was in effect before this past September 11, or is acquired by the taxpayer pursuant to a written binding contract entered into between the aforementioned dates and placed in service before Dec. 31, 2003.
In the Senate, Sen. Orrin Hatch, (R-Utah), introduced S.1553, the Economic Stimulus Through Bonus Depreciation Act of 2001, which was referred to the Senate Finance Committee. In so doing, Hatch acknowledged the House Ways and Means Committee’s approval of an “initial stimulus bill.”
The Senate bill would provide a 50-percent bonus depreciation deduction for business assets purchased between Sept. 11, 2001, and July 1, 2002, and placed in service before Jan. 1, 2003.
“This means,” said Hatch, “that businesses that want to take advantage of this strong incentive, which generally provides more than twice the first-year deduction that is allowed under current law, would have to act quickly and order the new business assets by next June 30 and take delivery by next December 31.”
As an example, Hatch used a new delivery truck (if aircraft are considered to be qualified property, substitute “aircraft” for “truck”) that cost $50,000. Under current law, the truck would be considered a five-year property and would be depreciated over a five-year period. If the truck were purchased next year, the current law depreciation deduction for the first year would be $10,000, or one-fifth the cost of the truck in the year of purchase.
Under S.1553, that same business would be allowed a 50-percent first-year depreciation deduction ($25,000) instead of the $10,000 provided under current law. The bill would require that a business make a decision and enter into a contract to purchase a new asset by next June 30 and take delivery by next December 31.
This is in contrast with H.R.3090, which provides for a 30-percent extra depreciation deduction and allows the purchaser to take almost three years to decide to buy the asset and then allows another several months to place the property into service. The House bill provides for a recovery period for the asset of 20 years or less but the Senate bill would apply to all types of depreciable property.
If either bill includes some form and degree of change in depreciation deductions, and if new aircraft are classified as qualified property, it may behoove both prospective buyers and sellers of aircraft to keep abreast of congressional activities in this regard.
However, economic stimulus bills may not have smooth sailing through both legislatures, as partisan politics will probably influence what eventually emerges. As to the differences in depreciation deduction provisions between the House and Senate bills, the customary procedure would be to refer the bills to a conference committee for resolution. Haste for passage may also be tempered by concerns over whether the stimulus packages will do what is necessary to increase capital spending, the job supply and productivity.
Government spending in response to the terrorist attacks has dug deep into the till and suggests that there must be an awareness of government income vs outgo for all the other government spending programs that Congress will have to address.