Aircraft owners and potential buyers should be aware of imminent changes to aircraft bonus depreciation rules. Understanding these changes is essential for anyone considering an aircraft transaction, as the opportunity to capitalize on substantial tax benefits is set to diminish after 2022.
A Brief on Bonus Depreciation Rules and Their Evolution
The Tax Cuts and Jobs Act of 2017 I.R.C. § 168(k)(2)(C) presented significant tax incentives for new investments in business assets, prominently including new and pre-owned general aviation aircraft. To avail the full bonus depreciation of 100% of the asset’s cost, the aircraft had to be operational by the end of 2022.
Starting 2023, these benefits are set to phase down. Aircraft owners will be able to deduct only 80% of the cost for aircrafts brought into service in 2023, 60% in 2024, and so on, decreasing by 20% each year. By 2027, the bonus depreciation will disappear entirely. It’s worth noting that this isn’t only applicable to aircrafts but to all fixed assets acquired from January 1, 2023.
However, exceptions exist. The I.R.C. stipulates a delay of one year in this phasedown for “Transportation Property” or “Certain Aircraft” if they adhere to some specific prerequisites. In essence, they can still avail the 100% bonus depreciation in 2023 if certain criteria are met.
Breaking Down the Definitions
- Transportation Property typically refers to aircraft used as part of a business operation, including airlines or charter services.
- Certain Aircraft applies to those not primarily employed by a business that specializes in chartering goods or people.
To qualify for the one-year phasedown delay, Transportation Property or Certain Aircraft must be obtained, delivered, or contractually bound before Jan. 1, 2024. The stipulations further detail:
- The Transportation or Aircraft should exceed $1 million in cost and have a production time of over one year.
- Certain Aircraft are eligible for the delay if a non-refundable deposit (whichever is less between 10% of the cost or $100,000) is made, the aircraft costs a minimum of $200,000, and the production time surpasses four months.
Given these specifics, for aircraft anticipated to be operational in 2027, a binding purchase agreement must exist before January 1, 2027, to qualify for the remaining 20% bonus depreciation.Timeline At A Glance
Furthermore, a crucial requirement specifies that 25% of the aircraft’s utility should cater to “qualified business use,” and over 51% must serve the entire business operation.
The Clock is Ticking: Act Now with IntelliJet
Considering we are already in September 2023, it’s worth noting that aircraft transactions aren’t instant processes. They require meticulous planning, coordination, and time to ensure a smooth transition and completion. Therefore, for businesses and individuals who wish to reap the maximum depreciation benefits, it’s critical to act immediately. Contacting IntelliJet now can help streamline this process, offering expert guidance and ensuring that your plans get off the ground seamlessly.
Concluding Thoughts
The timeline indicates a gradual decline in depreciation benefits:
With the impending changes, businesses in the aviation industry must promptly strategize their tax plans. Completing aircraft transactions by the end of 2023 not only maximizes depreciation benefits for the 2022 tax year but ensures advantageous returns in the years to come. Your partnership with IntelliJet could be the decisive factor in navigating these shifting skies.