While many aircraft buyers in 2023 will be ‘stuck’ with 80% Bonus Depreciation for Aircraft they acquired this year, many taxpayers are unaware that they may still be eligible for the 100% Bonus Depreciation deduction.  If you ordered an aircraft before January 1, 2023 and are taking delivery of the aircraft before January 1, 2024, you are probably eligible for 100% Bonus Depreciation in 2023.

Having the ability to use 100% Bonus Depreciation for newly acquired aircraft, means that taxpayers that are eligible for this deduction may use the entire purchase price of their aircraft to reduce their other taxable income in 2023.

For example: If a taxpayer purchases a new $500,000 aircraft in 2023 and they have $500,000 in taxable business income as well, they are likely to be eligible for the 100% Bonus Depreciation deduction to reduce that $500,000 of taxable income to $0.  For a ‘married filing jointly’ taxpayer that pays roughly $122,500 in tax on that $500,000 in income, they will pay $0.

What is Bonus Depreciation?

     In 2002, in response to the economic ‘meltdown’ that followed the 9/11 terrorist attacks in the United States, Congress passed the “Job Creation and Worker Assistance Act of 2002” in an attempt to stimulate the economy.

     This stimulus package included ‘Bonus Depreciation’, which allowed an instant 100% tax deduction in the year of purchase for certain manufactured personal property.  This property primarily consisted of vehicles and machinery that required large factories, and more importantly factory workers, to produce these products. 

By incentivizing the purchase of these goods with tax breaks, Congress hoped the increased sales of these products would result in new job creation and retention throughout the US.  Bonus Depreciation was very helpful in reviving the economy following the 2001 attacks and while it was never permanent tax law, Congress would continue renewing the popular deduction for an additional 15 years after the original law was passed.

     However, as part of the massive overhaul of the income tax system in 2017, Congress passed legislation that would slowly ‘phase out’ the Bonus Depreciation deductions over the following decade.  Currently, the phase-out is intended to be complete in the 2027 tax year.  However, with the United States economy trending somewhat downwards and with the upcoming election cycle, we fully expect the Bonus Depreciation deductions to be resurrected at some point before it is completely phased out.

     Nonetheless, the phase-out has begun in 2023 and we do expect it will continue at least through the 2024 tax year.  What does this mean for Bonus Depreciation?  In 2023, the phase out allows for an 80% immediate tax deduction for eligible property (aircraft for our discussion purposes), and the remaining 20% that is not deducted using Bonus Depreciation, will be deducted over the following 5 years using an accelerated depreciation schedule. 

That’s still not bad and it is still an incentive to buy an aircraft and deduct it this year! However, what if you could deduct 100% of the purchase price of the aircraft in 2023?  Wouldn’t that be better?  What if you were already eligible for the 100% Bonus Depreciation deduction on an aircraft you purchased this year and didn’t even know it?

100% Bonus Depreciation in 2023 Exception

     While you are typically required to use the Bonus Depreciation deduction that is available for the tax year you put the aircraft in service (meaning the year you bought the aircraft in most cases), you are actually eligible to use 100% Bonus Depreciation in 2023 if you ordered a new aircraft in 2022 and met a handful of other requirements that most taxpayers will likely have already fulfilled.       

There is an exception to the phase-out in 2023 that allows a taxpayer a 100% Bonus Depreciation deduction in 2023 if they:

• Ordered their aircraft prior to January 1, 2023 and then take delivery before January 1, 2024.
• Enter into a ‘binding agreement’ to acquire the aircraft (purchase agreement).
• Must have a cost in excess of $200,000.
• Make a deposit of the lesser of $100,000 or 10% of the purchase price of the aircraft.
• Not use the aircraft as ‘Transportation Property’ (meaning: charter or commercial aircraft).

     The threshold to qualify for this exception to the phase-out in 2023 is not very high, as you can see from the requirements.  While it seems that there would not be too many scenarios that allowed taxpayers buying used aircraft to take advantage of the exception unless it was a purchase at the very end of 2022, for taxpayers that ordered a new aircraft in 2022, it is very likely they would be eligible.

     It would not be a stretch to say that taxpayers ordering newly manufactured aircraft in 2022, did not take delivery of their new aircraft in 2022. Due to the manufacturing constraints created by the pandemic, most manufacturers are still a long way behind in their delivery queues, thus accidentally making most taxpayers eligible for the exception.  Additionally, the other requirements to qualify for the exception are likely to have been fulfilled already as many are standard order practices of most aircraft manufacturers.

     While most CPA’s handling your personal and business taxes are very competent and extremely good at what they do, most CPA’s do not know how to handle the complexities of aircraft taxation. 

This is where Ascendant Aviation Tax & Accounting can help.  Most of our engagements include structuring the ownership and operation of your aircraft in order to maximize income tax deductions and reduce or eliminate sales tax on the acquisition of your aircraft.   We become another member of your ‘tax team’ specializing in helping your and your other tax advisors to pay as little tax with as little risk as possible in your aircraft ownership.

     Let us take a look at your aircraft purchase and see if we can help. Click on the “Schedule Call” button at the top of this page to schedule a Free Consultation call on how we can make this strategy work for you.

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