David G. Mayer, who is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton, explains how an aircraft owner can claim 100% bonus depreciation even if they plan on using it for personal use.
Can a prospective aircraft owner benefit from claiming 100% “bonus depreciation” even though the owner expects to fly the aircraft for personal use? Yes, with limitations and careful structuring under the Internal Revenue Code (IRC). However, in doing so, it is essential to harmonize potentially conflicting rules in the IRC with the Federal Aviation Regulations (FARs) and state law, including sales/use tax laws.
The Tax Cuts and Jobs Act of 2017, which became law on December 22, for the first time allows aircraft owners temporarily to take 50% or 100% bonus depreciation deductions on pre-owned aircraft. It also doubles the pre-existing 50% bonus depreciation to 100% of the cost of certain new aircraft.
A business taxpayer who owns an aircraft can take 100% bonus depreciation deductions under the IRC against gross income if it uses the aircraft in its trade or business or for production of income. However, an owner cannot take depreciation deductions for personal use, including entertainment, amusement or recreation.
The IRC allows certain owners to deduct depreciation from gross income by two methods. The first is straight-line depreciation created under the Alternative Depreciation System. This allows owners to take equal depreciation deductions each year of the “recovery period” — the years to fully write off aircraft. That is six years for aircraft operated under Part 91 and 12 years for aircraft operating under Part 135.
The other depreciation method is the Modified Accelerated Cost Recovery System (MACRS). MACRS allows an owner to write off its aircraft and certain helicopters in five years for Part 91 usage and seven years for Part 135 usage. An owner must qualify for MACRS to claim either 100% or 50% bonus depreciation.
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