Should Aircraft Buyers Take Advantage of Bonus Depreciation before It Expires?

 - November 26, 2011, 11:11 AM

Accelerated depreciation for private aircraft became a hot topic again this past June when President Obama repeatedly cited it as a prime example of special tax breaks for the rich he wanted to eliminate.

Yet the President had previously extended 100-percent bonus depreciation for capital equipment purchases in the year they are made, including new business aircraft, in his own 2009 economic stimulus package. He re-inserted it again in his much-vaunted $447 billion Jobs Act that he encouraged Congress to pass “right now” in September. However, Congress does not seem inclined to do so at the moment.

So should you make a buying decision this month to take advantage of bonus depreciation that, absent further congressional action, will expire at the end of 2011? 

The true value of bonus depreciation for American general aviation has long been debated. Under current rules, you can write off the entire value of a new aircraft purchase or new capital equipment purchased for a used aircraft acquired this year. Or you can depreciate it over five years under the rules and sliding scale of the Modified Accelerated Cost Recovery System (MACRS) or take the depreciation over the course of seven years. The President’s Jobs Act would eliminate MACRS depreciation, commonly referred to as “accelerated depreciation,” for private aircraft.

There is no question that concerns about bonus depreciation have spurred sales discussions in certain quarters, but has it, in and of itself, convinced a significant number of prospective buyers to “pull the trigger” and buy a new airplane right now?

The short answer appears to be "no."

Industry experts point to the fact that the American general aviation market is becoming increasingly export-driven. Bonus depreciation applies only to U.S. buyers. Beyond that, publicly-traded companies remain nervous about making any kind of new capital acquisition due to continued uncertainty about the economy and the “dithering in Washington,” said Shawn Vick, executive vice president of Hawker Beechcraft. “It is a function of their confidence and comfort in making large capital decisions to improve the growth and efficiency on their business,” Vick said.  “They are watching the (political) rhetoric and they are asking where this is all going. When people have more confidence, they will make decisions.” 

The sluggish economy is helping to maintain the large “delta” between the price of new and comparable used aircraft, said Josh Mesinger, vice president of jet aircraft broker J. Mesinger. “Most people have been driven by the lower prices [of used aircraft],” said Mesigner. The gap in prices between new and used fair outstrips the economic recapture available under bonus depreciation, Mesinger said.

However, bonus depreciation does seem to be benefiting the used-aircraft refurbishment market, said Nel Stubbs, vice president of business aircraft consulting firm Conklin and DeDecker. “We’ve seen a lot of people using it to buy good used aircraft—there are a lot of them out there-- and the ability to used it to buy capital equipment for those aircraft. Any capital improvement is entitled to the bonus depreciation so it has been a really good deal for the used aircraft markets,” she said.

Jim Allmon, president of the turboprop modification company Blackhawk, agrees. Allmon said a substantial portion of his company’s domestic business this year has been from small companies looking to take advantage of bonus depreciation to more economically modify their aircraft.

Vick said that bonus depreciation is very important to the service and modification side of Hawker Beechcraft’s business and its ability to sell used aircraft to people who immediately want to update them. “It comes back to us in the form of spending at the service centers. Customers can spend north of seven figures to modernize an airplane and it (bonus depreciation) keeps that part of our business growing.” 

While bonus depreciation may not play much of a role in driving sales of new, top-of-the-line business jets to institutional buyers, Vick said that it is significant for small to mid-cap private businesses. “They have a greater degree of interest in how it (bonus depreciation) will impact them and its ability to add incentive for them to act now is clearly there.”

Vick said that this category of buyer represents approximately one-third of Hawker Beechcraft’s business and is a large share of its King Air buyers. He added that this segment tends to be less concerned with macro economic factors. “They are successful, pragmatic people spending their own money, making their own decisions, and getting on with life.”

Stubbs pointed out that bonus depreciation may be useful in starting a sales discussion, but actually taking full advantage of it can be complicated. “Among my clients it is a great incentive to get them interested in the aircraft, but at the end of the day they don’t necessarily need a 100-percent write-off this year.” She also cautioned that those taking bonus depreciation can expect greater IRS scrutiny.

“The real impact is higher IRS audits,” Stubbs said. “You are going to go to the top of the list, if you are taking bonus depreciation because they are going to make sure you follow all the rules. A lot of people are putting their aircraft on Part 135 certificates, so they can create passive losses so they can’t take depreciation in the year the event occurs. When you place an aircraft on a Part 135 certificate and operate under the rules all the time, you are no longer actively participating in the operation of that aircraft. By virtue of that, it is now a passive loss.

"If you have a lot of passive income to take advantage of that passive loss in that year then it will take care of that. But if you don’t have enough passive income that depreciation keeps rolling until you have enough passive income to take care of that depreciation ,” she explained.  

“We have all these different issues come up when a person is buying an aircraft,” Stubbs concluded, adding that the decision on whether take bonus depreciation should be well thought out in advance.