Here’s what you need to know;
100% Bonus Depreciation for both factory new and pre-owned aircraft
The aircraft has to be used for business.
It has to be the first time the aircraft has been used by the new owner.
100% bonus depreciation is retroactive to September 27th, 2017
All of this subject to the IRS and limitation in Section 179 (awaiting clarification)
1031 Like Kind Exchange Eliminated
The savings realized by 100% bonus depreciation should offset the recapture.
Buyers will have the remainder of the year to replace their aircraft.
There is no requirement to identify or purchase a “like kind” asset under the new plan.
More about bonus depreciation...
The primary requirement to qualify for bonus depreciation is business use, the aircraft must be utilized for business purposes, we are currently waiting on clarification as to what percentage will be required.
The tax benefits are to be applied in the year the aircraft was first put into service. The availability of bonus depreciation is retroactive to September 27th, 2017, if the aircraft was placed into service after that date, for the first time, you probably qualify to immediate expense the allowable amount of the purchase price, i.e. purchased and placed in to service November 2017, write-off applied to 2017 tax return.
At Jet Acquisitions we have a keen interest in 100% bonus depreciation on new and used aircraft and how that will impact the used aircraft market and in turn our clients. The information we have shared here has been accumulated from a variety of sources we deem reliable, but we strongly encourage that you contact your CPA or tax adviser for guidance. If you do not have an aviation knowledgeable tax adviser, please contact us and we will refer someone to assist. We also want to be very clear that the IRS has yet to way in on this new tax law and that they may enforce the new rules with conditions that we are currently unaware of.
More about 1031 Like Kind Exchanges...
There is a considerable push right now to amend the tax law to reinstate, at least for a period of time, Section 1031 for business property, but I do not expect it will be successful, in most cases the ability to immediate expense at 100% will more than offset the recapture due from selling a depreciated aircraft.
The ability to do a 1031 "like kind" exchange in aviation has become an expected course of business, in fact there are several companies that specialized in facilitating both 1031 exchanges and 1031 "reverse like kind" exchanges. Currently, as written, the law eliminates Section 1031 of the IRS code, which allowed for a "like-kind" exchange of a depreciated asset.
Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provided an exception and allowed the taxpayer to postpone paying tax on the gain, provided they reinvested the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 was tax-deferred, but not tax-free.
The exchange may have included like-kind property exclusively or it may have been like-kind property along with cash, liabilities and property that are not like-kind. If the taxpayer received cash, relief from debt, or property that was not like-kind, however, they may have triggered some taxable gain in the year of the exchange. There could have been both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.
As great as the benefits of Section 1031 were, it was not without considerable hassle. The fact that the replacement aircraft had to be identified in advance presented an obstacle for many buyers who's needs or desires changed during the acquisition process. Many actually lost the benefit completely because they aircraft they purchased ended up being different than the specific type of aircraft they had identified. The other issue was the 180 day rule, which meant that the new asset had to be purchased within four months, which sounds reasonable until you consider the time it takes to locate, negotiate and manage an aircraft through pre-purchase inspections.
Utilizing 100% bonus depreciation to offset recapture means that as long as the replacement aircraft is placed into service the same year that the previous aircraft was sold, the credit will eliminate the liability. The exception being if the aircraft purchased is less valuable than the amount of recapture, but in this unlikely scenario you would not have qualified for a like kind exchange to begin with.
There's actually no requirement for a "like kind" asset at all under the new plan, you can sell a commercial building and use the funds to purchase an aircraft utilizing immediate expensing to offset the recapture due from liquidating the depreciated asset.
More about the USED aircraft market...
If you plan to purchase an aircraft in 2018 the time is now, the reality is that the advantages of the new tax law and the ability to immediate expense an aircraft purchase will drive the used aircraft market, prices will go up and selection will drop. We expect issues with completing purchases in Q4 as people attempt to close on aircraft before year for tax purposes. It has been ten years since we have experienced steadily increasing aircraft values. It is a phenomenon that is unusual, desirable real estate and classic cars have times when they increase in greatly in value, but most other assets do not. I'm excited to see if my predictions come true, but IF aircraft values, which have been stable for some time, actually start to increase, it will be a game changer for used aircraft purchasers. There's nothing more exciting than buying a toy, using it for business and actually watching it go up in value!
More about the new aircraft market...
The effect on new aircraft sales may very well be the opposite of what we anticipate for the used market. The old 50% bonus depreciation on NEW aircraft only, served as a leveling factor between the expense of a new aircraft and a pre-owned aircraft. The tax benefit of buying a new was used to justify the higher expenditure. With the playing field leveled it will be very interesting to see what happens to new aircraft delivery numbers. It may be that the increased demand and the fact that the tax incentive is so much larger offsets the economy of buying used and causes new aircraft sales to remain robust.
We do anticipate a recovery of used aircraft values, and it stands to reason that late model aircraft, especially those that are just a few years old will see the greatest increase in prices.
Please do not hesitate to contact me with any questions you may have, if I cannot answer them I will get you in touch with a tax professional who can.
Many thanks to Rep. Todd Rokita (R-4-IN) and Sens. Pat Roberts (R-KS), Jerry Moran (R-KS) and Jim Inhofe (R-OK) for their significant efforts to secure immediate expensing of used equipment.