Sizing up a new tax break
If you’re shopping for a preowned business aircraft, the 2017 federal tax law’s biggest news may be that you can now take advantage of 100 percent bonus depreciation, a benefit previously reserved for purchasers of new airplanes. The writeoff for used aircraft (those placed in service by Jan. 1, 2027) “will help the business aviation industry turn the corner” this year, according to the National Aircraft Resale Association (NARA), which represents some major airplane brokers.
Will bonus depreciation really accomplish that goal? And if you were to purchase a preowned model, how beneficial would this change in tax policy be for you?
“On the surface, it sounds really attractive,” says Pete Messina, lead CPA with Jetlaw in Washington, D.C. “But I’m not sure what impact it really has on the used market.”
Related laws may impact the value of the tax break, Messina says. For one thing, eligibility for bonus depreciation requires that the aircraft be employed at least 50 percent for business and under the new law, using it for business entertainment no longer counts toward that percentage.
Moreover, you can apply bonus depreciation only to the percentage of the airplane’s cost that equates to the percentage of business use. Say you buy a Hawker 900XP for $4.6 million and half of its use this year is for business. In that case, the writeoff is limited to half the cost—$2.3 million. Moreover, you can’t depreciate more than your income for the year, so you’ll need $2.3 million in income in order to write off that much. So while the bonus depreciation could be a boon for some, it may not be the impetus for the turnaround NARA postulates.
Meanwhile, gray areas could impede efforts to capitalize on the bonus rule. Messina cites management company clients of his that help their high-usage charter customers acquire aircraft. “Because of the price point and [the high level of] charter activity, [buyers] are making money on those acquisitions,” he says. “That was never a formula that worked before.” But bonus depreciation isn’t available for an asset previously used by its buyer. If the management company’s customer ever chartered the aircraft he or she later purchases, does that render it ineligible for the tax benefit? “We’ll wait for guidance from Treasury,” says Messina.
What if you planned to buy a new aircraft—say a Global 6000 priced at $62 million—in part because of the depreciation benefits? Does it now make sense to consider a preowned model? “Absolutely,” says Messina. (By the way, preowned Global 6000s are selling at less than half the price of new, as the table on this page indicates—a long way from turnaround territory.)
So how should bonus depreciation affect your purchase plans? Industry veterans advise consulting aviation tax and/or accounting specialists who can evaluate your situation and provide guidance. That’s something the revision hasn’t altered.