The year is quickly coming to a close (Good Riddance 2020) and so are the HUGE tax advantages that Congress granted to taxpayers considering an aircraft purchase. While, 100% Bonus Depreciation is not a new concept for educated aircraft buyers, the additional opportunities presented by the CARES Act, may have slipped past even the most savvy tax planners. For taxpayers that acquire an aircraft and use it to some extent for business purposes, business people that have structured their ownership and operation of their aircraft correctly, can take advantage of 100% Bonus Depreciation in 2020. This means that as long as the taxpayer has ‘more than 50% business use’ of their aircraft, they may deduct up to 100% of the purchase price of the aircraft.
The United States tax code, more specifically Internal Revenue Code Section §168(k) Special Allowance for Certain Property, allows a taxpayer to deduct 100% of the purchase price or acquisition cost of ‘qualified property’. As Part 91 aircraft fall under the category of ‘qualified’ property, an aircraft that qualifies for MACRS accelerated depreciation, may be depreciated 100% in the first tax year in which the aircraft was placed in service.
MACRS or Modified Accelerated Cost Recovery System is the depreciation schedule that is used for qualified business property that is used ‘more than 50%’ for business in a tax year. Typically, for a Part 91 aircraft, the schedule would allow the taxpayer to deduct 20% of the purchase price of the aircraft in the first year, followed by 32% in the second year, 19.2% in the third year, 11.52% in the fourth and fifth year, and 5.76% in the final year.
This schedule is definitely faster than an aircraft will physically deteriorate, however Congress has passed legislation that would allow for an even faster depreciation schedule, the 100% Bonus Depreciation option. If you are qualified for the MACRS schedule, you may choose the 100% Bonus Depreciation option in that first year instead of the six year schedule.
For many people, this option seems counterintuitive and they are skeptical that the government would allow for such unbelievable tax benefits. However, you always need to consider the ‘social agenda’ that exists in the creation of laws. Why are there such steep taxes on cigarettes? The government deems that smoking is bad for your health and they want to discourage people from smoking. The government considers a high tax on cigarettes as a deterrent to keep the public from smoking AND the tax is meant to recoup the medical and research costs incurred by the Government as a result of the adverse health effects from smoking.
While the government can discourage its citizens from what they deem harmful activities with increased taxes, they can also encourage desirable actions by providing tax benefits. By providing the 100% Bonus Depreciation benefit on the purchase of qualified property, such as aircraft, the Government is protecting manufacturing jobs in the aerospace industry. The higher demand there is for new aircraft, the higher the supply that will be produced by the manufacturers and thus the need for additional manufacturing jobs. Economics 101!
But why is the 2020 tax year different than any other year? Hasn’t Bonus Depreciation been around for more than a decade now? Yes! Bonus Depreciation has been preserved and renewed every year it has come up for expiration in the last decade. However, COVID-19 has prompted Congress to go even further to spur the economy and save the Country from economic ruin.
Early on in the battle against the pandemic, Congressional leaders recognized that the quarantine was having an unprecedented impact on businesses, small and large. They decided that extraordinary action was necessary to save the country from economic ruin. The Paycheck Protection Program was one strategy that Congress employed to provide relief to employers and employees that might have otherwise lost all income for the unknown length of time that the pandemic would shutter businesses of all sizes.
Another strategy that Congress employed to help businesses was one that would give taxpayers with Net Operating Losses the opportunity to request refunds and immediately put much needed cash in the hands of the struggling businesses. A Net Operating Loss occurs when losses exceed income on a businesses tax return. Typically, those losses are suspended until there is a net income in a future year, in which that suspended loss can be used. This means that if you have several years of losses in a row, you may not get to use the loss until you are profitable again, even if the year before you were profitable and paid taxes.
HOWEVER, with the new CARES Act provisions, Congress has opened the door to allow taxpayers to CARRY BACK net operating laws for up to five years to a year where businesses or business owners paid income taxes. It is as simple as filling out a refund request form for the fourth and fifth years and amending the tax returns of the first three previous years.
How does this affect a potential aircraft buyer????? You could purchase a new or used aircraft in 2020. You can use the Bonus Depreciation against your 2020 taxes and if there is more depreciation than income, you can carry back that Net Operating Loss up to five years back, and claim a refund on taxes you paid the Federal Government in those years.
We always recommend that you speak with a qualified aviation tax professional and the professionals at Ascendant Aviation Tax & Accounting are there to help you and advise you on how to best take advantage of these new tax benefits. But, you should not wait too long, as the Carry Back provision of the Cares Act expires at the end of 2020.
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