Tax laws that affect business aircraft owners are constantly changing, and a new law this year makes the process of complying with these tax laws even more complex. Dean Sonderegger, director of product management at Bloomberg BNA Software, explained the new law and how his company’s software helps owners keep track of tax implications to ensure that they meet the legal requirements and don’t pay more tax than is necessary.
The most significant tax law facing aircraft owners is bonus depreciation, which expired on January 1. Although Congress has approved ways to make bonus depreciation permanent (House) or extend it for two years (Senate), nothing is likely to happen to make these provisions law until after the elections in November, according to Sonderegger.
The other important tax development, he said, is the new Internal Revenue Service (IRS) “tangible property” regulations, which took effect on January 1. “These govern how companies account for repairs to assets such as jets,” he explained. “There is a whole set of rules around whether you have to capitalize repairs as assets with depreciable life or whether or not those can be written off as an expense in the year the repair occurred. For the tax year beginning January 1, owners have to take a look at repairs that occur and determine if they have to capitalize and track those.”
From a tax standpoint, an owner would prefer to write off the repairs as a deductible expense when they occur, Sonderegger said, “because it reduces taxable income in the year the repair is done.” If the owner must capitalize the repair as an asset, then its depreciable life is recognized over a depreciation period (usually five to seven years), and that isn’t as beneficial to the owner’s tax situation, given expected inflation and the reduced value of money in subsequent years. And if the owner decides to sell the aircraft, then the write-off of the repair will have to be accounted for and might result in his having to pay money back to the IRS after the sale.
Sonderegger pointed out yet another tax situation that will likely affect aircraft owners, although not in the near term, and that is a change to the depreciation period. Business aircraft are usually depreciable under the Modified Accelerated Cost Recovery System (MACRS), which allows for accelerated depreciation in early years, according to NBAA. If MACRS can’t be used, then the aircraft might be subject to the Alternative Depreciation System (ADS), which has longer recovery periods. MACRS periods are five years for business aircraft operated under Part 91 or seven years for commercially operated aircraft (Part 135), NBAA explained.
Aircraft last much longer than five to seven years, Sonderegger said, and recent developments in Congress indicate that these periods could change. “It’s a very real threat,” he added, “but not until after the next [presidential] election.”
Bloomberg BNA Software is designed to help owners track assets and account for fixed assets for income tax, financial and book accounting purposes. “It does all the accounting and takes into account all these rules,” Sonderegger said. The software is sold by subscription and starts at about $2,500 per year for a small business. Current clients include airlines and U.S. corporations of all sizes. “It doesn’t differentiate on [company or asset] size,” he said. The software helps owners manage complex asset situations, such as tax law changes, mergers with other firms with similar assets and the short tax year that is involved, buying new assets, adding new assets to an aircraft via modifications and maintenance, and gains or losses when the aircraft is sold. “You can do things via planning with the software that will save money on taxes if planned correctly,” he said.