Depreciate Your Used Aircraft 100% in the First Year

Changes to the tax code in 2017 allow businesses to accelerate the book depreciation of their aircraft purchase to the first year.

This is what you need to know

WHAT CHANGED?

• The passage of the 2017 “Tax Cuts and Jobs Act” changed the first-year depreciation limit from 50% to 100%

• Previously, Bonus Depreciation exclusively applied to new aircraft, now it also applies to used aircraft

• 1031 Exchanges (A.K.A. Like-Kind) are no longer allowed for Personal Property

WHO CAN TAKE ADVANTAGE OF BONUS DEPRECIATION?

This is more complicated than one might think and there are a number of pitfalls that must be considered.

1. Bonus Depreciation is exclusively for business aircraft and for business use. That means that more than 50% of the aircraft’s usage falls under business-use (defining “business-use” requires a strict view of the tax code).

2. The aircraft must be eligible for the Modified Accelerated Cost Recovery System (MACRS). A major qualificant of which is that the aircraft cannot be predominately used outside of the United States.

3. The future use of the aircraft must continue to be predominately for business use, failure of this could result in the IRS recapturing the depreciation in later years.

4. Regardless of when a purchase order is signed, the aircraft must be placed into service before January 1, 2023. That may seem like a long time but growing manufacturer backlog could easily have delivery dates 4-5 years down the line (I’m looking at you, PC-24).

IS IT ENOUGH?

Ultimately, these types of regulatory incentives are aimed at providing a meaningful boost to the economy. So how has it done? As of posting, the aircraft sales market has made a huge resurgence with values slowly rising and sellers gaining the upper-hand as inventory levels fall across all aircraft types. Bonus Depreciation could surely be described as a factor in this type of growth, coupled with the overall economic success of the United States over the past few years.

I believe the greatest outcome of the Bonus Depreciation program is the number of first-time buyers that have entered the world of aircraft ownership. For many of our clients, Bonus Depreciation was not only a factor but the primary driver to purchase today. This program has allowed countless small businesses to enter private aviation because the economics are simply more attractive than ever before. As with any piece of legislation, I always caution my clients that these types of programs could be rolled-back, so these provisions may not last until 2023.

SPEAK TO AN EXPERT

We advise all of our clients to seek aviation-specific tax and legal support throughout their ownership cycle and when it comes to using Bonus Depreciation it is an absolute necessity. Your personal CPA may be the best around, but groups that specialize in aviation simply understand the pitfalls associated with these large write-offs. Flight Level Partners has built a trusted network of experts that we would happily refer to, without hesitation.

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Cameron Tipton, ASA

Author:

Cameron Tipton, ASA

Co-Founder/Director of Brokerage

Flight Level Partners

Aircraft Value (briefly) Explained

Depreciation

If you have owned a house or car you know that depreciation can spell bad news for your bank account. Aircraft are certainly not immune to depreciation, but many people are confused about what depreciation looks like for an aircraft. To understand how aircraft value's change over time we must first examine why all items lose value: obsolescence. 

As your car ages, new, more advanced cars will come onto the market. As time goes on, your car will continue to become less and less desirable against its newer cousins. As such, your car's value will reduce to the lowest value of its utility and components. This is a simplistic view, but one that illustrates why aircraft hold value so well.

Airplane Parts Have High Utility

Over time, you will typically find that your aircraft's value reduces at a much slower pace than other transport assets. This is largely due to the high utility of aircraft components as they age. Even as the physical airframe ages the engines, avionics, and most other components continue to retain their value.

But, why?

The "why" is really interesting (at least to an appraiser, like me). While aviation seems like it would foster amazing innovation - it really doesn't. Safety concerns, bureaucratic red tape, and lack of market desirability make it difficult for manufacturers to offer any innovative designs to market. This means, that there is much less market pressure driving your aircraft's obsolescence. That wing design, those expensive engines, and all those gauges up front are unlikely to change anytime soon. Even if they did, market implementation is typically sluggish at best which keeps your aircraft's value stable.  

So, is an Airplane a Good Investment?

An airplane certainly can be a great investment. While much of the investment payout will be in increased productivity and tremendous amounts of time saved, there is much to be said about that final residual value. As of today, many aircraft markets are performing well. In fact, many values have increased steadily over the past few years - predominantly in the turboprop and light jet market. The overall utility of these markets, in particular, has time-and-again proven to protect residuals. 

It's safe to say that the overall value of an aircraft depends entirely on how the owner plans to use it. There is an enormous value-add for the owner and users of general aviation that can far outweigh any actual depreciation.