With proper planning, many business aircraft owners can enjoy significant tax savings by potentially writing off their operating expenses in addition to the depreciation of their aircraft and related equipment.
While benefits can vary, business owners who are in the market for a new or used aircraft in particular can position themselves for the best first-year tax savings opportunities by utilizing an accelerated depreciation strategy that takes the calendar year into account.
Completing an aircraft purchase and placing your plane into business service at the right time can make all the difference in the world when it comes to maximizing aircraft depreciation related savings.
MACRS – How it Works
With the intent of encouraging business investments, the Modified Accelerated Cost Recovery System (MACRS) was established by the passage of the Tax Reform Act of 1986. This system allows for the capitalized cost (basis) of tangible assets to be recovered over time through annual income tax deductions for depreciation.
Under MACRS, certain property—including aircraft and equipment—is in certain circumstances eligible for accelerated depreciation schedules which allow for a greater percentage of deductions to be taken during the first few years of the recovery period.
Aircraft based primarily in the United States that are used for qualified business purposes (i.e. Part 91 business use flights) for 50% of the time or more are typically eligible for (MACRS), allowing aircraft owners to recover acquisition costs within a timeframe considerably shorter than the expected economic life of the aircraft.
Half Year Convention Vs. Mid Quarter Convention
MACRS is designed to encourage business investments during the first nine months of the year. As dictated by the Tax Code, aircraft and/or equipment (as well as other assets) purchased and placed into service during this time period are treated ‘as if’ they were placed in service on July 1st and as such receive a half year of depreciation deduction in the year of purchase. This is known as ‘half year convention’.
If a business owner acquires more than 40% of his or her aggregate capital additions including aircraft and/or related equipment in the last quarter of the year however, the amount of the allowable depreciation deduction is considerably less. For many businesses, the addition of an aircraft alone may place the company in this position. For these acquisitions, the Tax Code is written such that assets are considered to be placed in service at the mid-point of the last quarter.
It is important to note that an aircraft purchased for business use must be ‘placed in service by September 30th in order to be eligible for the half year convention depreciation schedule. You must possess legal title to the aircraft and your plane must be readily available for your use by September 30th in order to qualify. Making a deposit and/or signing a contract are not enough to meet the ‘placed in service’ qualification.
If you are currently in the market for a business aircraft, the September 30th deadline for half-year convention depreciation is fast approaching! Be sure to speak with a tax professional so you know what is required in order to close this month.
If it is no longer feasible to take meet the September 30th ‘placed in service’ date based on where you are in the buying process, note that business owners can still benefit when purchasing an aircraft in the last quarter of 2015 by placing the aircraft in service before December 31st.
Also keep in mind that while Bonus Depreciation expired at the end of 2014, it is possible Congress will renew bonus depreciation in 2015, creating the opportunity for even greater potential savings. (Subscribe to the Shoreline aviation news feed on this page and we’ll keep you posted!)
Speak with a Tax Professional
Many factors must be taken into account in determining whether or not an aircraft may be depreciated, and if so, which method of depreciation and recovery period should be utilized.
Use of the aircraft for non-business flights as well as other variables can impact the allowable depreciation deduction available within a given year. Every individual and business is different and the potential savings and benefits described in this article will not apply to all taxpayers!
Operators are encouraged to work with qualified aviation tax and legal counsel to determine the best approach for depreciating business aircraft in a manner that takes their unique circumstances into account.
Consulting with a qualified tax professional is of paramount importance to understanding your particular tax circumstances - and determining the best approach for depreciating your business aircraft for the 2015 calendar year. We urge you to obtain competent advice to determine the best strategy for your 2015 capital investments or contact the tax experts at Advocate Consulting.
Shoreline Aviation takes great care to include accurate and complete, current information on this web site, however the information in this web site is provided 'as is' without warranty of any kind, either express or implied, including, but not limited to, the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. Shoreline Aviation does not represent or warrant that the content included in this web site is free of errors or omissions and shall have no responsibility for errors or omissions in this web site.