At the NBAA Convention last month, credit for a recent increase in used aircraft sales was frequently given to the bonus depreciation benefit that is part of the Jobs and Growth Tax Relieve Reconciliation Act that went into effect this year. “It has already been a boost to used aircraft sales, and it is going to affect new aircraft sales,” said a sales executive at the convention.
In simple terms, the bonus depreciation benefit accelerates the tax advantage already available into the year of the aircraft acquisition, explained Edward Kammerer, a partner with the law firm of Edwards & Angell in Providence, R.I., and a member of NBAA’s tax committee.
The act does not create additional depreciation benefits for existing aircraft owners, but it does increase the depreciation deductions in the first year of aircraft ownership, thereby decreasing the amount of depreciation deductions in all subsequent years.
Under the Modified Accelerated Cost Recovery System (MACRS), owners of business aircraft have historically enjoyed the ability to recover 100 percent of the cost of their business aircraft through depreciation deductions. But as a result of the 2003 tax act, owners of new business aircraft have the option of taking up to 50-percent of the adjusted cost of the a new aircraft in the first year as a “bonus depreciation.” The remaining 50 percent of the cost of the aircraft is then depreciated over the remaining tax life of the airplane, starting in the year of acquisition.
Under the 2003 Tax Act, the “placed in service” date for eligibility for the 30-percent bonus depreciation has been extended from before Sept. 11, 2004 to before Jan. 1, 2005. In addition, the 2003 Tax Act created a separate class of property called “50-percent bonus depreciation property,” which also expires on Jan. 1, 2005. Under the 2003 tax act, the taxpayer can treat qualifying property acquired after May 5, 2003, as “50-percent bonus property.”
In essence, “qualified property” is defined as property that is contracted for, purchased and placed in service within a prescribed window of time. There are four basic requirements that must be satisfied for an aircraft to qualify for the 50-percent bonus depreciation:
- The recovery period under MACRS must be 20 years or less.
- The “original use” of the aircraft must begin with the taxpayer on or after May 5, 2003.
- The taxpayer must purchase the aircraft after May 5, 2003, but before Jan. 1, 2005. In addition, there can be no written binding contract for the acquisition of the aircraft in effect before May 6, 2003. Finally, with respect to an aircraft that is manufactured, constructed or produced by an aircraft owner or for an aircraft owner, the manufacture, construction or production must begin after May 5, 2003.
- The taxpayer must place the aircraft in service before Jan. 1, 2005. The pre-Jan. 1, 2005 placed-in-service date is extended to Jan. 1, 2006, for certain aircraft “used in the trade or business of transporting persons or property.”
The joint explanatory statement issued by the House and Senate Tax Conference Committee with regard to the bonus depreciation contained good news for owners of new fractional aircraft interests. It states that the first owner of a fractional interest in a new aircraft is considered the “original user” of its proportionate share of the aircraft. Although not expressly stated in the revised statute, it is therefore clearly Congress’ intent that fractional interests in new aircraft will qualify for bonus depreciation. The subsequent release of temporary regulations by the Internal Revenue Service has confirmed that fractionals are a proper subject for depreciation and do qualify for the bonus depreciation.
The joint statement by the House and Senate further notes that an aircraft acquired by a taxpayer in a like-kind exchange or as the result of an involuntary conversion would qualify for the bonus depreciation.
The temporary regulations confirm this. They provide that the unused basis in the relinquished aircraft may be added to the depreciable basis of the new aircraft for purposes of calculating bonus depreciation.
Also, leased aircraft sold by the original lessor to another lessor within three months of the date the aircraft was originally placed in service will continue to be eligible for the bonus depreciation–provided the identity of the original lessee/user of the aircraft does not change.
The temporary regulations also state that aircraft temporarily used for personal reasons will continue to be eligible for bonus depreciation, provided the aircraft is converted to business use and otherwise meets the requirements of “qualifying property.”
Kammerer warns that taxpayers should continue to review the law of their particular state to determine whether the bonus depreciation will reduce the amount of income that is taxable at the state level. Not all states are following the federal government’s bonus depreciation rules. He further points out that the bonus depreciation allowance makes tax planning more important than ever, as taxpayers must be sure they will be able to use the accelerated deductions in the years they are available.
And under any circumstances, he concluded, with regard to this and any tax matter, taxpayers are advised and encouraged to consult their own tax and legal consultants for guidance concerning their particular situation.