Special Bonus Depreciation Rules for Aircraft Purchasers in 2022
Client Alert
This year, 2022, may be the last year in which most aircraft acquisitions will qualify for 100% bonus depreciation. In order to qualify for 100% bonus depreciation, used aircraft and some new aircraft will need to be placed in service before the end of this year. Special rules, however, extend the placed-in-service deadline for many new aircraft to qualify for 100% bonus depreciation by a year to the end of 2023.
Don’t expect to meet the placed-in-service deadline to qualify your next aircraft for 100% bonus depreciation? Don’t worry. You still may be entitled to claim bonus depreciation on your next aircraft, albeit at a lower rate. Bonus depreciation will remain available for most aircraft placed in service through the end of 2026 (2027 for many new aircraft), but at rates that will be stepped down 20 percentage points per year over a four-year step-down
Detailed Analysis
In 2017 Congress passed the Tax Cuts and Jobs Act (“TCJA”) which, among other things, amended Section 168(k) of the Internal Revenue Code (“I.R.C.”). Section 168(k) allows a taxpayer to claim a depreciation deduction in the year the taxpayer places “qualified property” in service. This depreciation deduction is commonly known as “bonus depreciation.” The amount of the bonus depreciation deduction is a percentage of the taxpayer’s adjusted basis in the qualified property, with the percentage being determined in part based on the year that the qualified property is placed in service.
Under the TCJA, the applicable percentage for qualified property placed in service during tax years 2018 through and including 2022 is 100%, but that percentage will decrease by 20 percentage points per year in each subsequent year through the end of 2026, after which, absent Congressional action to amend Section 168(k), bonus depreciation will no longer be available. Therefore 2022 is currently scheduled to be the final year of 100% bonus depreciation for most qualified property.
All property must meet the requirements of qualified property under I.R.C. § 168(k) to be eligible for bonus depreciation. Those requirements specify that property must have a recovery period of 20 years or less, must meet an original use or acquisition date requirement, and must be placed in service before January 1, 2027. Bonus depreciation does not apply to property which the taxpayer elects or is required to use the Alternative Depreciation System as a result of the limitations of § 280F of the I.R.C.
There are special rules, however, which apply to two classes of property that are of special interest to new aircraft buyers. These include property classified as “certain aircraft” (hereafter, “certain aircraft”) and property classified as “property having longer production periods” (hereafter, “long production property”). These special rules delay the bonus depreciation percentage phase-down schedule at each level by one year, which means that any new aircraft that qualifies under either of these classifications is eligible for 100% bonus depreciation if placed in service in 2023. To be clear, though, any aircraft that does not fall within either the “certain aircraft” or the “long production property” classifications may still qualify for bonus depreciation, but only at the rate in effect for “qualified property” as of the date such aircraft is placed in service.
The rules under which new aircraft may qualify for the one-year extension to the place-in-service deadline at each level in the phase-down schedule are as follows:
Long Production Property and Certain Aircraft Rules
For any aircraft to be considered long production property or certain aircraft, the aircraft must be acquired pursuant to a written binding contract entered into before January 1, 2027 and must be placed in service prior to January 1, 2028.
In addition, for an aircraft to be considered long production property the aircraft must be “transportation property,” which generally means it must be predominantly used in commercial charter or for-hire operations. In addition, the aircraft must be subject to uniform capitalization rules under I.R.C. § 263A, and must have an estimated production period longer than one year and a cost exceeding $1,000,000.
These rules significantly reduce the usefulness of the long production property rules for new aircraft purchasers. The production time for most corporate jets is generally under one year, and many business aircraft owners may be unlikely or unwilling to meet the predominant use requirement to be treated as transportation property, mainly due to the fact that doing so would require that the aircraft be leased to a commercial charter operator, and such leasing would likely result in the characterization of the deduction as “passive” under I.R.C. § 469.
Conversely, for aircraft to qualify as certain aircraft, the aircraft must not be transportation property (other than for agricultural or firefighting purposes), and must have an estimated production period exceeding four months and must have a cost exceeding $200,000. In addition, at the time of the contract for the purchase of such aircraft, the purchaser must make a nonrefundable deposit in an amount equal to or greater than the lesser of $100,000 or 10% of the purchase price.
Meeting the requirements for treatment as certain aircraft is more likely for owners of business aircraft, as opposed to qualifying as long production property.
It should be noted that the term “bonus depreciation” is misleading. Generally speaking, taxpayers have long been allowed to depreciate the full cost basis of property used in a trade or business or for the production of income under the Modified Accelerated Cost Recovery System (“MACRS”), but depreciation deductions under MACRS are spread out over a number of years, whereas the full amount of a bonus depreciation deduction may be claimed all at once in the year qualified property is placed in service. In short, bonus depreciation does not entitle a taxpayer to more depreciation than the taxpayer would otherwise be entitled to in the absence of bonus depreciation. Rather, bonus depreciation accelerates deductions by allowing a taxpayer to claim a greater proportion (up to 100%) of those deductions in the year the property is placed in service than would otherwise be possible under MACRS alone.
GKG Law, P.C.’s business aircraft practice group provides full-service tax and regulatory planning and counseling services to corporate aircraft owners, operators and managers. The group’s services include federal tax and regulatory planning, state sales and use tax planning, and negotiation and preparation of all manner of transactional documents commonly used in the business aviation industry, including aircraft purchase agreements, leases, joint-ownership and joint-use agreements, management and charter agreements, and fractional program documents.
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