Although the accelerated-depreciation bonus has been credited with a pickup in orders for new business jets, the General Aviation Manufacturers Association is encountering rough going in the Senate over its efforts to get the tax break extended.
Under the most recent law, the first-year bonus depreciation is 50 percent for new aircraft and similar capital equipment. It applies to aircraft purchased after May 5 last year and before next January 1, and requires that the new aircraft be placed in service by next January 1.
GAMA has characterized the bonus depreciation as a “defining factor” in $2 billion in jet sales, and made extending the deadline its top legislative priority this year. But the association’s entreaties to have the deadlines shoved back have met with a cool reception from a Senate that says it wants to put the brakes on spending. The White House is also in opposition.
The Joint Committee on Taxation and the Congressional Budget Office argue that extending the accelerated depreciation would reduce revenue by $12 billion over the next 10 years. Congressional bean counters used a “static” scoring model, which GAMA argues is inaccurate.
“We are continuing to try to press for bonus depreciation,” said GAMA president Ed Bolen, admitting that concerns about the size of the federal deficit have made the effort “challenging.”
The first accelerated-depreciation bonus was included in the Job Creation and Worker Assistance Act of 2002 to provide an economic incentive to businesses to purchase new capital equipment. It allowed the buyer to take a “bonus” 30-percent depreciation deduction in the first year in addition to the normal 20 percent. To be eligible for that 30-percent bonus, the aircraft had to be purchased after Sept. 10, 2001, and before this September 11, and placed in service before next January 1.
Last year, GAMA helped lead a successful effort in having the bonus depreciation increased to 50 percent for new aircraft purchased after May 5 last year and before next January 1. This provision was attached to the Jobs and Growth Tax Relief Reconciliation Act of 2003. But it still required that aircraft be placed in service by next January 1, which is one of the provisions that the GA manufacturers would like to see amended.
In the first three months after the first-year depreciation was increased to 50 percent, the general aviation industry saw a 43-percent increase in orders. GAMA said a survey of aircraft purchasers revealed that the 50-percent bonus depreciation was a deciding factor in a large percentage of those sales.
While Congress intended bonus depreciation to remain a powerful incentive for capital purchases through the remainder of this year, the realities of the aircraft-manufacturing industry will force the incentive to end this spring because it generally takes OEMs eight to 14 months to fill a customer’s order. Unlike some other capital goods, business jets are not built on speculation. An aircraft purchased now might not be delivered in time to meet the January 1 deadline for service entry.
In presenting its argument, GAMA said it does not believe the $12 billion figure is accurate, but with a static-scoring model, “that’s what the model kicks out,” said Bolen. “So that creates a big problem for us.”
He acknowledged that GAMA has found a little more receptivity on the idea that, if bonus depreciation cannot be extended for everybody, GA manufacturers should at least have an extension of the placed-in-service window. “So what we are saying to people is, gosh, it looks as if we are losing the value of bonus depreciation before other people are,” Bolen explained, “and we're losing it because in our business you can’t build on spec and our products have such a long lead time.”
He said Sen. Blanche Lincoln (D-Ark.), whose constituency covers some major completion facilities, has an amendment that would extend the placed-in-service window for GA aircraft. It could be attached to tax legislation already working its way through the Senate.
“If we can’t get an extension of the bonus-depreciation provision,” said Bolen, “we would like to be able to extend the placed-in-service window. What that would allow us to do is continue to offer bonus-depreciation throughout the year as a sales tool.” That could allow buyers to order this year and take delivery next year.
Earlier this year GAMA said it wanted to see the depreciation bonus made permanent. Failing that, it called on Congress at least to extend it one year and eliminate the placed-in-service deadline.