On January 2nd, President Obama signed into law H.R. 8, the ‘American Taxpayer Relief Act of 2012’ (2012 Tax Payer Relief Act, public law number P.L. 112-240).
The Tax Payer Relief Act raises income taxes on some higher income earners, but also includes provisions that avert numerous tax increases scheduled to go into effect in 2013, and preserves certain tax breaks that were slated to expire.
The law extends a variety of tax breaks for businesses and individuals, including bonus depreciation provisions which apply to new aircraft purchases as well as to new equipment purchased for used aircraft—subject to the requirement that purchased aircraft and equipment be used primarily for business purposes.
The bonus depreciation incentive will be extended to qualified aircraft and equipment purchases made in 2013 as well as to those aircraft delivered in 2014 in fulfillment of 2013 contracts which meet qualifying criteria.
Bonus depreciation provides a dramatic tax benefit, allowing for the amount of 50% of the cost of aircraft purchased to be depreciated in the first year of service, rather than depreciation of the full purchase amount over a five or seven year period, as is typically allowed under the current MACRS (Modified Accelerated Cost Recovery System) depreciation code.
50% Aircraft Bonus Depreciation…and more
What is not immediately obvious is that actual first year depreciation may be even higher.
For example, for aircraft buyers who qualify for Bonus Depreciation at the 50% level and meet requirements for the standard five-year MACRS depreciation schedule, the actual first year allowable depreciation will total as much as 60% in the first year of ownership for qualified tax payers, which is the sum of 50% Bonus Depreciation added to 20% of the remaining 50% of aircraft cost, as dictated by the 5-year MACRS depreciation schedule. (i.e. 20% of 50% is equal to 10%).
For aircraft buyers who qualify for Bonus Depreciation at the 50% level and fall into the standard seven-year MACRS schedule, allowable depreciation will total approximately 57% in the first year of ownership.
To calculate potential bonus depreciation savings you may be eligible for, given the type of aircraft that you are considering purchasing visit the Depreciation Calculator provided by Advocate Consulting Group.
Section 179 Expensing Benefits Significantly Increased
Taxpayers will also discover significant potential savings in updates that have been made to the Section 179 deduction allowance for 2013. The Section 179 deduction generally enables businesses to deduct a portion of the cost of qualifying property placed into service (for business use) during the tax year. In 2012, Section 179 allowed businesses to deduct up to $139,000 of qualified capital expenditures. The Tax Payer Relief Act increases the Section 179 deduction amount to $500,000 for 2013 and retroactively for 2012.
As such, not only will Section 179 offer substantial potential savings to taxpayers investing in business aircraft or equipment in 2013, but it may also offer significant savings to those who purchased business aircraft or invested in upgrades to their business aircraft in 2012, in that the extent to which such investment can be expensed in the 2012 tax year will be far greater.
The Section 179 expensing option is also significant in that it can be applied to both new and used capital investments. And furthermore, application of Bonus Depreciation does not preclude Section 179 benefits. In other words, in some cases both benefits may apply.
For example, for the purchase of an aircraft costing $2 million, an amount of $500,000 would potentially be available to qualified tax payers as a Section 179 deduction, leaving $1.5 million to which bonus depreciation could be applied (50% of $1.5 million) - for a bonus depreciation amount of $750,000. Add to this the typical 5-year depreciation amount of 20% of the remaining cost (20% of $750,000 is equal to $150,000) for a total depreciation amount of $900,000. Combined with the 179 deduction, the first year write-off would total $1.4 million – which is equal to 70% of the cost of the new aircraft.
Speak with a Tax Professional
Potential savings and benefits described in this article will not apply to all taxpayers! Every individual and business is different. Consulting with a qualified tax professional is of paramount importance to understanding your particular tax circumstances - and how these incentives may benefit your 2012 and 2013 tax outcomes.
We urge you to obtain competent advice to determine the best strategy for your 2013 capital investments or contact the tax experts at Advocate Consulting.
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