Threshold Requirements for Bonus Depreciation Eligibility
To be eligible for bonus depreciation, in general, 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 at least 50% of the time for total business use. Those threshold requirements might seem simple, but as demonstrated below there are a lot of complex tax concepts enmeshed that also need to be analyzed.
Bonus Depreciation Phase Down
Business owners who satisfy threshold eligibility requirements can achieve 100% bonus depreciation more easily under the general rules of the IRC introduced by the Tax Cuts and Jobs Act (“TCJA”), and under IRC § 168(k)(6), a phase down of 20% per year begins 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, subject to certain exceptions.
Basic Requirements to Qualify
Under the Tax Cuts and Jobs Act (“TCJA”) and subject to the phase down described above, taxpayers may be eligible for bonus depreciation and take an immediate deduction of up to the entire cost of an acquired aircraft if certain requirements are met, including the following:
- The commercial or non-commercial aircraft qualifies as depreciable property with a recovery period of 20 years or less;
- The aircraft cannot have been used by the taxpayer prior to its acquisition by the taxpayer; and
- The aircraft is placed in service by the taxpayer after Sept. 27, 2017 and before Jan. 1, 2027.
Additional Requirements
For an aircraft to qualify for bonus depreciation, the aircraft must also be eligible for depreciation under the Modified Accelerated Cost Recovery System (“MACRS”). The two main requirements for MACRS depreciation are as follows:
- The use of the asset is predominately within the United States.
“Predominant use within the U.S.” is interpreted to mean what it says; the predominant use of the aircraft must have been for flights within the U.S. On this point, it is vital for those aircraft owners who frequently fly internationally to have detailed records of use. - The aircraft must satisfy the IRC 50% Qualified Business Use Test.
“Qualified business use” is well-defined as any use in the taxpayer business. However, there are a few exceptions, including leases or compensatory flights to a 5% owner and related parties. There are exceptions to these exceptions, however, which provide that so long as at least 25% of the flight activity of the aircraft is for core business operations and qualified business use, then the company can include compensatory flights and other flights for leasing to a 5% owner and related parties in calculating the 50% Qualified Business Use Test.
If you fail the 25% test or pass the 25% test but cannot meet the overall 50% test, you do not qualify for bonus depreciation. If you pass both tests, you generally qualify for MACRS accelerated depreciation and can take bonus depreciation.
Beware of Exceptions – Good and Bad
The above requirements for bonus depreciation should be viewed as general rules, and the IRC contains a number of different exceptions to these general rules. Some exceptions impose limitations. For example, as noted above, IRC § 280F limits depreciation for aircraft leased to related parties or used personally by employees. In addition, IRC § 274 limits depreciation for personal entertainment use. Other exceptions impose incredible benefits. For example, IRC § 168(k)(2)(C) offers a one-year delay of the phase down rules for “certain aircraft.” This article does not contain or evaluate all the exceptions, and you should consult your aviation tax advisors or aviation legal counsel to determine whether you qualify.
If you would like assistance with determining whether you qualify for bonus depreciation, please call us at the number below or email us at Counsel@BizjetLaw.com.