Aircraft Bonus Depreciation: Outlining the Changes

When a business aircraft is purchased, depreciation is used to recover a portion of the asset’s cost via tax breaks during a stipulated recovery period. As an aircraft declines in value, depreciating an asset helps owners to subtract the inherent reduced value during an asset’s usable lifetime.

However, if an aircraft owner wishes to optimize tax deductions from depreciation, a clear understanding of this subject, the regulatory environment, and the available depreciation methods, are needed. The advice of a Business Aviation tax specialist should always be sought.

Bonus depreciation within the Business Aviation sector was designed to stimulate investment in aircraft, while supporting economic growth. However, the depreciation’s benefits and limitations are intended to prevent accelerated depreciation from applying to property used to an excessive extent for personal use of the aircraft.

Thus, the benefits of bonus depreciation can be realized if an aircraft is utilized for business purposes at least 50% of the time, and have allowed businesses to deduct 100% of the aircraft’s depreciation in the very first year of ownership instead of amortizing it over multiple years. As of January 1, 2023, however, that 100% deduction reduces to 80% in the first year.

Eligibility and Regulatory Environment

To understand, and be eligible to benefit from bonus (or accelerated) depreciation in business aircraft, the Internal Revenue Code Section 280F provides the framework and guidelines. It requires that the aircraft be used at least 50% of the time for business purposes.

Passing this rule is key for taxpayers wanting to deduct optimal bonus depreciation as provided for in the Tax Cuts and Jobs Act of 2017. However, while the regulatory environment and guidelines may seem straightforward to many aviation tax and legal experts, it is in fact a highly complex area, subject to interpretation.

If an aircraft owner is not able to take optimal bonus depreciation benefit in Year 1, they may choose to use other accelerated depreciation methods, such as the Modified Accelerated Cost Recovery System (MACRS) or the straight-line approach, also known as the Alternative Depreciation System (ADS). And the MACRS depreciation differs from five years for aircraft placed in Part 91 operations to seven years for Part 135 ops.

By understanding the primary use of the aircraft (business vs. commercial flights), and by using flight miles or hours as a performance metric, it’s possible to determine the appropriate depreciation life of the asset.

Moreover, and as covered by the National Business Aviation Association in its ‘Detailed Analysis of 280F Depreciation’ booklet, if an aircraft qualified for bonus depreciation in a year in which bonus depreciation is or was available, either 50% or 100% of the cost of the aircraft can be depreciated in the year when the aircraft was placed in service (subject to the phase down of 100% bonus depreciation noted above).

As should be clear from the above information, doing your homework (or preferably having a qualified expert do it for you) is key if you wish to optimize a tax claim through your aircraft acquisition.

Those failing to meet the 50% qualified business use rule under the Internal Revenue Code Section 280F in any year of the depreciation period may not claim bonus depreciation or accelerated depreciation using MACRS and may be required to recapture excess depreciation claimed in prior years.

2023 Outlook and Potential Exemptions

With year-end 2022 fast approaching, the bonus depreciation benefits outlined by the Tax Cuts and Jobs Act of 2017 are changing. As of January 1, 2023, the allowable amount will reduce to 80%, 60% in 2024, 40% in 2025, and 20% by 2026.

Let’s imagine a buyer is considering the purchase of a $15m pre-owned Super Mid-size business jet which qualifies for 100% bonus depreciation.

The aircraft was acquired and placed in service on September 15, 2022, allowing the owner to depreciate 100% of the cost of the aircraft, and the aircraft total acquisition cost can be used to reduce taxable amount. 

Assuming an illustrative tax rate of 35%, this means a $5.25m reduction in tax payment.

If the owner places the same aircraft in service on January 1, 2023, the asset would then be depreciated 80% in the first year (in addition to the first year’s MACRS depreciation percentage for the remaining 20%). The result would be a lower reduction in tax payment compared to the $5.25m under 100% depreciation.

Meanwhile, the 100% accelerated depreciation for brand new aircraft sales should remain at 100% during 2023, rolling back to 80% in 2024, down to 20% by 2027, provided the aircraft meet additional requirements allowing for this one-year extension. (Nevertheless, I – along with many industry advocates –expect to see the phasing out of bonus depreciation revised for the better in the future.)

Again, we urge you to speak to your Business Aviation tax expert regarding these special rules.

In Conclusion

If you are planning to buy an aircraft either new or pre-owned, find a qualified aviation team, including tax, law and accounting experts to understand both the potential impact and the consequences of planned usage of the aircraft. Likewise, it is key to understand the various scenarios, and the amount of applicable tax breaks.

As mentioned above, Part 135 operations could change the picture entirely when it comes to tax benefits. So if you plan to defray some of the fixed costs of operating your aircraft with charter revenue, it is essential to consult your tax expert and plan the amount of charter hours it would be beneficial to allow annually.

Non-business use of the aircraft limits the benefits you can access – so it may also be necessary to stipulate the type of charter flight your aircraft can execute when you’re not using it, too.

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