Written and contributed by: Chris Sundberg of Husch Blackwell
The Tax Cuts and Jobs Act of 2017 (the “Tax Law”), permits qualified purchasers of new and pre-owned aircraft to elect, for the purchaser’s first year of ownership, to deduct from the purchaser’s gross income 100% of the purchaser’s basis in the aircraft (what we will call in this summary “Depreciation”). Notably, absent congressional action, this permitted deduction will shrink starting in 2023, dropping 20% each year for four years until it fully expires at the end of 2026. This summary provides a high level review of key considerations for purchasers seeking to take advantage of this new, larger deduction.
To take the Depreciation deduction, the aircraft must be purchased pursuant to a written agreement signed after September 27, 2017, and the aircraft must be placed into service before January 1, 2023. For most aircraft purchases occurring in either calendar year 2018 or 2019, neither of these conditions should prevent a qualified purchaser from deducting the full amount of the Depreciation.
Perhaps most importantly, the aircraft must be “predominantly used in a qualified business use for any taxable year.” Though seemingly straight forward, there are two interrelated requirements that arise from this statement. As a general rule, “qualified business use” includes activities directly associated with the purchaser’s trade or business as well as activities that are for the production of income. Further, the aircraft must be predominantly used for such “qualified business use.” At a high level, the predominantly used test is satisfied if 50% of the use of the aircraft during the applicable tax year is: (i) in a trade or business of the purchaser; or (ii) for the production of income. However, certain activities may not be counted for purposes of satisfying this 50% test unless all other trade or business uses comprise at least 25% of the total use of the aircraft during the tax year. For example, unless the 25% test is first met, operations of the purchased aircraft pursuant to leases to persons who own 5% or more of the purchased business or to persons who are related to the aircraft owner (such as a family member) do not qualify as operations of the aircraft for a “business purpose.” Importantly, for purposes of eligibility, the aircraft must be “predominantly used in a qualified business use” during the tax year for which the aircraft purchaser wishes to take the Depreciation deduction.
Finally, the Tax Law introduced a new, but ambiguous requirement for purchasers hoping to qualify for 100% bonus depreciation. Specifically, “the original use” of the aircraft must begin with the taxpayer. Unfortunately, neither Congress nor the Internal Revenue Service has clarified exactly what this phrase means or how this language might apply to new or pre-owned aircraft.
Importantly, this summary is not a comprehensive review or analysis of the Tax Law, but instead only emphasizes that there are a number of complex, and sometimes vague, requirements that must be satisfied to qualify for the Depreciation deduction. Careful planning around the operation of the aircraft will help meet many of these requirements. It is important to discuss with your legal adviser or qualified accounting professional (prior to making the decision to purchase an aircraft) these requirements to understand the applicable law, and to carefully craft both the ownership structure and operation of the aircraft.
Husch Blackwell is an industry-focused law firm with offices in 18 cities across the United States. The firm represent clients around the world in major industries including energy and natural resources; financial services and capital markets; and technology, manufacturing and transportation.
For more information, visit huschblackwell.com.
For additional information, please contact Chris Sundberg.
Altivation does not provide aircraft or aviation tax consulting. If you require tax consulting services, Altivation can help direct you to an aviation legal adviser or qualified accountant.
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