A Brief Guide to Aircraft Depreciation
Don’t miss out on tax deductions from depreciation. Get on your way to understanding aircraft depreciation and its tax implications.
To deduct or not to deduct? That is the $1 million question.
As an aircraft owner, you want to take full advantage of any tax breaks you can find. And this means you need to understand depreciation and how it works for an aircraft.
Depreciation allows business owners to deduct the cost of their equipment over time. This applies to aircraft, too. But only if your plane is used the right way.
In this article, we’ll take a brief look at aircraft depreciation. And we’ll check out how you can take advantage of it to save some money.
Business or Personal?
The most crucial factor to consider when buying an aircraft is how you plan to use it. There are a ton of benefits for small businesses that own aircraft. And as long as you’re using it for business purposes, you can write off many of the operating expenses.
To reap the most benefits of the depreciation deduction, business flights must account for 50% or more of the flying time. Even if your aircraft use is less than 50% business, you may still be able to deduct business expenses for those business flights.
And you may even be eligible for some depreciation. Always check with your accountant when it comes to tax matters like depreciation. Let’s take a look at the two primary methods of depreciating aircraft.
Modified Accelerated Cost Recovery System (MACRS)
Modified accelerated cost recovery system (MACRS) is a common aircraft depreciation schedule. You can use this method only if business use is 50% or more of flight time.
Under a MACRS schedule, a higher percentage of the depreciable value is taken over the first few years. And the schedule is shorter, between 5 and 7 years. It’s essential to know the value of your plane when you create a depreciation schedule.
The MACRS method is preferred by most owners because of its acceleration. It’s a front-loaded system that lets you deduct most of the cost of your aircraft within a few years.
Here’s an example MACRS schedule with percentage deductions:
- Year 1 – 20%
- Year 2 – 32%
- Year 3 – 19%
- Year 4 – 12%
- Year 5 – 12%
- Year 6 – 5%
Alternative Depreciation System (ADS)
The ADS system might be an option for you if your business aircraft usage is under 50%. But again, your accountant will know more about the subject.
ADS depreciation schedule takes the deduction equally (straight line) over a more extended period. Twelve years is a standard timeframe for an ADS depreciation schedule on an airplane.
Remember that even when you use ADS, you must prove your business use. An increase in personal flights during the year may impact the depreciation schedule. So stay aware of how usage affects deductibility.
Here’s an example of an ADS schedule:
- Year 1 – 6%
- Years 2-12 – 8%
- Year 13 – 6%
Use Aircraft Depreciation to Your Advantage
As an aircraft owner, take full advantage of aircraft depreciation whenever possible. This means you must do your homework before you buy the aircraft and while you own it.
Also, consult with your tax preparer. They know the best way to own and operate the aircraft, so it qualifies for tax breaks.
Business and personal usage times matter when it comes to taxes. Be clear on how you’ll use your aircraft before you buy it.
The two primary methods of depreciation are MACRS and ADS. How you use the aircraft depends on which way you’ll qualify for.
Another vital element of aircraft ownership is staying on top of the value of your machine. Need a valuation guide? We’ve got you covered!
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