I’m learning to fly, around the clouds.
But what goes up, must come down.
I’m learning to fly, but I ain’t got wings.
Coming down, is the hardest thing.
“Learning to Fly” (Tom Petty and the Heartbreakers)
The Tax Cuts and Jobs Act of 2017 was a mixed bag for aviation. One of the major trade-offs in the bill was to eliminate tax deferred Section 1031 exchanges for aircraft while providing (in theory) the temporary benefit of 100% bonus depreciation for both used and new business aircraft. Effective at midnight on January 1, 2023, that 100% bonus depreciation begins its slow fade away into history.
So, are there still opportunities for 100% bonus depreciation in 2022 and beyond? The answer is yes, but the windows are quickly closing. There will still be three possibilities: (1) 100% Bonus Depreciation for New and Used Non-Transport Aircraft Placed in Service in 2022; (2) 100% Bonus Depreciation for New Non-Transport Aircraft under a Binding Written Contract in 2022 and placed in Service prior to 2027; and (3) 100% Bonus Depreciation for New and Used Transport Aircraft in 2023.
The following article introduces and analyzes these three possibilities in detail.
100% Bonus Depreciation for New and Used Non-Transport Aircraft Placed in Service in 2022
The general requirements to claim bonus depreciation (whether 100% through the end of this year, or 80% next year) are:
- The taxpayer cannot have previously owned the aircraft;
- The aircraft must be used predominantly (more than 50%) inside the U.S., and this must continue throughout the taxpayer’s ownership of the aircraft or the IRS will recapture the bonus depreciation previously allowed;
- The aircraft must be used predominantly (more than 50%) for business use, and this too must continue throughout the taxpayer’s ownership of the aircraft; and
- The aircraft must be placed in service no later than December 31 of the applicable year.
While the general requirements don’t seem too tricky, they need to be followed carefully. The first requirement is self-explanatory. However, taking requirements 2 through 4 above as a whole, to qualify for 100% bonus depreciation the taxpayer needs to conduct at least one business flight in 2022 within the U.S. on an aircraft that is in the condition required by the taxpayer. If there is one business flight within the U.S. and one business flight outside the U.S. in 2022, bonus depreciation is unavailable because it would fail the requirement of predominant U.S. usage. Or if there is one business flight and one personal flight within 2022, then bonus depreciation is likewise unavailable.
As of the date of this article, there are about two months left in 2022, and the “placed in service” requirement may be particularly hard to meet if not already fairly far along in the acquisition process. To be “placed in service,” the aircraft must be “in a state of readiness and availability for its specifically assigned function” by the end of 2022. This means the aircraft must be in the condition required by the taxpayer or the lessee of the aircraft and failure has consequences. This issue has been litigated by the IRS in the past in audit situations, and the IRS has been successful in some high profile cases. When someone takes delivery of an aircraft in 2022 and defers work on it until 2023, the IRS may pay attention and challenge depreciation deductions.
100% Bonus Depreciation for New Non-Transport Aircraft Under a Binding Written Contract in 2022 and Placed in Service prior to 2028
While the opportunities for 100% bonus depreciation are fading for used aircraft, there are still opportunities as to newly manufactured aircraft.
New aircraft purchased directly from a manufacturer that will not be delivered (and therefore not placed in service by the owner) until after 2022 can still qualify for 100% bonus depreciation in the year of delivery from the manufacturer, as long as all of the following can be satisfied on or prior to December 31, 2022:
- The taxpayer and manufacturer must enter into a binding written contract for a new aircraft and this contract cannot limit damages to less than 5% of the purchase price for the aircraft for a breach by either party;
- The aircraft must have a purchase price exceeding $200,000;
- The taxpayer has made a nonrefundable deposit of the lesser of 10% of the purchase price or $100,000;
- The aircraft must have an estimated production period exceeding 4 months;
- The aircraft must be placed in service by the taxpayer prior to January 1, 2028; and
- The aircraft cannot be used in Part 135 charter operations by the taxpayer following delivery.
If any of the above requirements cannot be satisfied, then 100% bonus depreciation will be unavailable to the taxpayer (but the taxpayer could potentially qualify for lesser bonus depreciation in the year in which the aircraft is placed into service).
In the post-COVID 19 aircraft market, this option is still very viable. Once used inventory became exceedingly scarce in 2021 and 2022, orders for new aircraft began to increase dramatically. FMJ has seen many clients placing these orders for delivery in 2023 and beyond, and the manufacturers remain ready to keep their order books packed. So long as a new order meets the other requirements above, the 100% depreciation should still be available in 2023 and beyond.
100% Bonus Depreciation for New and Used Transport Aircraft in 2023
Sections 1 and 2 apply to business jets generally that are not “Transportation Property,” but if someone is in the market for transport aircraft, bonus depreciation may still apply.
“Transportation Property” is tangible personal property used in the trade or business of transporting persons or property. This could include all corporate aircraft that are predominantly used in charter. However, no definitive guidance exists.
The bonus depreciation requirements for transport aircraft are similar in that you would need a binding written contract for a new aircraft, but it also has additional requirements, including that the cost must be $1,000,000 or more and have a production period of more than one year. When thinking about acquiring aircraft that are not primarily used in a non-transportation business or that might be used primarily through a charter arrangement, please consider contacting FMJ to review the opportunities for bonus depreciation.
Final Thoughts
Bonus depreciation for business aircraft does not disappear at the end of 2022, but it does decrease by 20% in 2023, and it will continue to decrease every year thereafter until it does disappear as of January 1, 2027. Also, there are frequently reasons why bonus depreciation is not necessarily appropriate for all businesses and aircraft owners, usually based on their own particular tax situations.
If you are interested in discussing the alternatives and possibilities available, FMJ stands at the ready to help evaluate these options. There is still time to claim 100% bonus depreciation this year and, as discussed above, there are possibilities for bonus depreciation in the coming years.
In addition, be sure to engage reputable tax professionals to prepare for potential IRS audits. As 100% bonus depreciation fades into the sunset, FMJ anticipates that this is likely to become a significant audit focus for the IRS, especially with the IRS hoping to add 87,000 jobs in the coming years.
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