Did your company purchase an aircraft after September 27, 2017?
If so, your investment may be eligible for bonus depreciation. The 2017 Tax Cuts and Jobs Act (TCJA) allows eligible aircraft to receive 100% bonus depreciation in the same year as the purchase. The goal is to encourage small businesses to make investments that will stimulate the economy. However, act quickly because the deductible percentage will begin to phase down on January 1, 2023.
This provision allows businesses to write off the depreciation of a purchase all in one year. By taking the write-off now, your business can free up cash flow rather than slowly write off smaller depreciation percentages over several years.
How Bonus Depreciation Is Stimulating The Economy (And Why You Need To Move Quickly)
In a nutshell, bonus depreciation allows a business to deduct a much larger percentage of your business’s purchase the year it’s acquired. This is in contrast to deducting lesser amounts over a period of five to seven years.
In December 2018, the IRS provided guidance on deducting eligible expenses under Section 179. A few important things to note from Section 179 include:
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Taxpayers can deduct the cost of the particular property only after it has been placed in service
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Tax years post-2017 have an increased expense deduction from $500,000 to $1 million
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There was also an increase from $2 million to $2.5 million concerning the phase-out limit
This means that while bonus depreciation will be helpful to many businesses, not every expense will be eligible for deduction. Furthermore, the amount eligible for a deduction has increased along with the phase-out limit.
You must speak with your tax expert to determine eligible business expenses. In addition, you need to determine whether your business would benefit from bonus depreciation or spread the deductions in the years to come. Each business’s financials tell a different story, so this is not a one-size-fits-all benefit opportunity.
What Is Eligible For Bonus Depreciation?
While aviation professionals can take advantage of bonus depreciation, it is not an aviation-specific benefit. The tax incentive is eligible for a qualified business property with a work life of up to 20 years, including equipment, furniture, fixtures, machinery, computer software, and more.
Additionally, improvements to the interior of commercial buildings, known as qualified improvement property, can also apply for bonus depreciation.
For those in the aviation industry, the incentive encourages the purchase of heavy equipment and machinery to expand fleets and improve hangars. This can include aircraft and even pickup trucks as long as they weigh over 6,000 lbs.
Both new and used purchases are now eligible for bonus depreciation. This is another benefit to business owners who prefer to purchase qualified pre-owned property for a lesser price. For those in the aviation industry, buying used aircraft is a premier option – especially when considering the tax benefits.
Visit VREF for aircraft appraisals before you buy.
The Current Time Schedule For Bonus Depreciation
As of September 2022, bonus depreciation is set to decrease at the end of the year. Whether Congress will choose to renew to allow the continued early depreciation of a business’s eligible property is unknown.
Rather than speculate on what may come, let’s discuss what we know now.
The current bonus depreciation rules apply to property a business acquires and places into service between September 27, 2017, and before January 1, 2023.
If acted on before the end of 2022, your business can write off 100% of eligible property’s depreciation. However, this will phase down annually according to the following schedule:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
Unless extended by Congress, there will be no bonus depreciation in 2027.
It’s important to realize that all property acquired before September 27, 2017, will remain subject to the tax rules before the bonus depreciation incentive.
Bonus Depreciation Recapture
If you can take advantage of bonus depreciation, make sure to know the repercussions of reselling that equipment in a short period of time.
Bonus depreciation doesn’t allow a business to write off more depreciation than would be permitted before the law. Instead, it will enable businesses to write off the entirety of the depreciation in the first year rather than over several years.
Some businesses may opt out of bonus depreciation if they prefer to spread the write-offs. But they were selling property before the actual depreciation, and receiving the write-off may result in recapture.
In short, if you sell an aircraft too soon after benefitting from bonus depreciation, be prepared to repay the appropriate amount of bonus depreciation.
Have confidence in your aircraft purchase or sale with VREF on your side.
How You Can Benefit From Bonus Depreciation
According to Glen Hediger, an aviation tax expert and the president and founder of Aviation Financial Consulting, “Immediate expensing is an effective and attractive proposition for anyone planning their taxes, but not everyone who is eligible for bonus depreciation can realize the full benefits. Every aircraft purchase is a complex transaction, so purchasers should work with a qualified team of aviation-focused tax and legal advisors before acquisition to understand the potential pitfalls that regulatory operations or unrelated tax considerations could affect the full use of bonus depreciation.”
All this to say, yes, your business can benefit from bonus depreciation. It’s still important to know what aspects of your business expenses are eligible if you rely on the immediate expensing of your property’s depreciation.
Tax-paying business owners are in a position to stimulate their investments. In turn, this also supports economic growth within the United States. Before TCJA, depreciation deductions only applied to property bought as new. However, business owners can also benefit from the deductions on pre-owned property.
It’s also important to note that bonus depreciation is only eligible in the first year the depreciable property is placed in service. Not all businesses will see this as advantageous, depending on their unique circumstances. Those who do stand to experience benefits will likely see an increase in cash flow immediately rather than over several years.
VREF Is Your Trusted Aircraft Appraiser & AOPA Partner
VREF is your trusted aviation expert for aircraft appraisals and valuations. With over 28 years of experience, we have completed thousands of aircraft appraisals, assisting aircraft owners in making informed decisions.
As an official guide of the Aircraft Owners & Pilots Association (AOPA), VREF is proud to be a helpful resource to the aviation community. Our knowledge of aircraft appraisal and depreciation of all kinds makes us your go-to source to ensure wise financial decisions when buying and selling aircraft.
Are you thinking of buying an aircraft? Don’t purchase without getting the facts from your trusted partners at VREF first. Contact VREF today.