At every year end, business owners focus on tax-efficient growth. Up until 2022, those owners could take advantage of the 100% bonus depreciation mechanism without having to meet additional requirements. In 2023, the approach to bonus depreciation for business aircraft sees significant changes from previous years. While full depreciation for qualifying assets, including both new and used aircraft, was available under certain conditions as per Section 280F(b) of the Internal Revenue Code (I.R.C.) until the end of 2022, the scenario is now different.
Threshold Requirements for Bonus Depreciation Eligibility
To be eligible for bonus depreciation, there must be a purchase of an aircraft that is placed in service in furtherance of an active trade or business in the tax year in question and used at least 25% of the time for “qualified business use” and greater than 50% of the time for total business use. Those threshold requirements might seem simple, but there are a lot of complex tax concepts enmeshed which require a tax professional’s assistance to unpack.
Bonus Depreciation Phase Down
Prior to 2023, business owners who satisfied those threshold eligibility requirements could achieve 100% bonus depreciation more easily under the general rules of the I.R.C. introduced by the Tax Cuts and Jobs Act, and under I.R.C. § 168(k)(6) a phase down of 20% per year began with 2023. Aircraft placed into service in 2023 are eligible for 80% bonus depreciation, decreasing to 60% in 2024, and reducing further to zero in the following years.
IMPORTANT: The percentage of bonus depreciation an aircraft owner can take will begin to step down beginning in 2023 for aircraft that do not qualify for the one-year phase down delay applicable to longer production period property (e.g., transportation property) and certain aircraft. The table above further illustrates the phase downs each year for new and pre-owned aircraft.
Achieving 100% Bonus Depreciation in 2023
Aircraft purchasing business owners may still be able to achieve 100% bonus depreciation for one more year if they meet additional requirements in § 168(k)(2)(C) for “Certain Aircraft” or even more stringent criteria in § 168(2)(B) for “Long Production Period Property.”
Exception for “Certain Aircraft”
Certain Aircraft” are excepted and can still qualify for 100% bonus depreciation in 2023 if particular conditions are met:
- The aircraft is acquired before January 1, 2027.
- Purchase contract at time of signing requires buyer to make, and buyer made at the time of contract, a nonrefundable deposit equaling at least the lesser of 10% of the aircraft’s cost or $100,000.
- The aircraft has a production period longer than four months and costs more than $200,000.
- The aircraft must not be predominately used as transportation property (for example, not predominately used in charter operations).
For “Certain Aircraft” meeting these criteria, the full 100% bonus depreciation is available in 2023, with a gradual 20% decrease each subsequent year until 2026. To benefit from the 20% rate in 2027, there must be a binding contract in place before January 1, 2027.
Exception for “Long Production Period Property” – A Challenging Category
Aircraft classified as “long production period” property is also excepted and can still qualify for 100% bonus depreciation in 2023 under the long production period rules. This category, commonly called “transportation property” because it includes aircraft used for business transportation like charter services, faces more stringent criteria. Because business aircraft do not typically have production periods exceeding one year, or are predominately used in charter operations, most business aircraft are often excluded from this category.
Planning and Strategic Considerations
In summary, bonus depreciation can benefit business owners greatly, but careful planning and consideration of tax rules is needed before signing a purchase agreement to take advantage of 100% bonus depreciation in 2023. Consulting with a tax advisor that also specializes in aviation regulations is advisable to navigate these complex mechanisms.
If you would like assistance with determining whether you qualify for 100% bonus depreciation, please call us at the number below or email us at Counsel@BizjetLaw.com.