Dec. 19, 2014
By Richard C. Farley, Jr. of NBAA
This article is intended to provide Members with an introduction to the rules that relate to the topic of bonus depreciation. Readers are cautioned that this publication is not intended to provide more than an illustrative introduction to the subject matter, and since the materials are necessarily general in nature, they are no substitute for the advice of legal and tax advisors addressing a specific set of facts that readers may face.
On Dec. 19, 2014, President Obama signed into law the Tax Increase Prevention Act of 2014, which, among other provisions, extended the 50-percent special allowance for depreciation (“bonus depreciation”) for qualified property through the end of 2014. Prior to the enactment of this legislation, 50-percent bonus depreciation was extended through the end of 2013 for qualified property, thanks to the American Taxpayer Relief Act of 2012, which was enacted Jan. 2, 2013. Under the new law, 50-percent bonus depreciation is available for qualified property (“50-percent bonus depreciation property”) that meets certain requirements, including:
- Depreciable property of a specified type (e.g., tangible personal property with a recovery period of 20 years or less, such as non-commercial and commercial aircraft);
- The original use of the depreciable property must commence with the taxpayer after Dec. 31, 2007;
- The depreciable property must be acquired by the taxpayer:
- After Dec. 31, 2007, and before Jan. 1, 2015, but only if no written binding contract for the acquisition was in effect before Jan. 1, 2008, or
- Pursuant to a written binding contract that was entered into after Dec. 31, 2007, and before Jan. 1, 2015; and
- The depreciable property must be placed in service before Jan. 1, 2015 (or Jan. 1, 2016, for longer production period property (“LPPP”) and certain non-commercial aircraft (“Certain Aircraft”)).
However, depreciable property that must use the Alternative Depreciation System (straight-line depreciation method over the property’s class life) is not eligible for any bonus depreciation (e.g., aircraft used predominantly outside of the U.S. and aircraft used predominantly for non-business purposes).
The Tax Increase Prevention Act of 2014 modifies the acquisition requirement (#3 above) and the placed-in-service requirement (#4 above) for 50-percent bonus deprecation property. With regard to the acquisition requirement, the new law extends the back-end acquisition testing date from Jan. 1, 2014, to Jan. 1, 2015. This change results in a taxpayer-favorable, seamless extension of 50-percent bonus depreciation that does not restart the front-end acquisition testing date.
Similarly, the new law modifies the placed-in-service date requirement. To be eligible for 50-percent bonus depreciation, the property must be placed in service by the taxpayer before Jan. 1, 2015, or, in the case of LPPP (including transportation property) and Certain Aircraft, before Jan. 1, 2016.
LPPP is property that:
- Has a recovery period of at least 10 years or is transportation property;
- Is subject to § 263A; and
- Has a production period exceeding one year and a cost exceeding $1 million.
“Transportation property” is personal property used in the trade or business of transporting persons or property.
LPPP (including transportation property) is subject to a special basis rule. Under this rule, qualifying basis eligible for the 50-percent bonus depreciation is limited to the adjusted basis related to production before Jan. 1, 2015. Thus, for property constructed by a third party, this basis is limited to the lesser of the amount paid or percentage of work performed as of Dec. 31, 2014. Accordingly, a taxpayer whose payments as of Dec. 31, 2014, represent less work than has been performed to construct the aircraft as of that date, may wish to make additional payments to make up any deficit.
As noted above, Certain Aircraft that meet specific requirements also have an extended placed-in-service date prior to Jan. 1, 2016, for 50-percent bonus depreciation pursuant to the new law. The special basis rule (discussed above) applicable to LPPP (including transportation property) does not apply to such non-commercial aircraft. Therefore, the full basis of qualifying aircraft placed in service in 2015 is eligible for 50-percent bonus depreciation.
In order to qualify for the extended placed-in-service date, the Certain Aircraft must:
- Not be transportation property (other than for agricultural or fire-fighting purposes), as defined above;
- Be purchased and, at the time of the contract for purchase, the taxpayer must have made a non-refundable deposit of at least the lesser of 10 percent of the cost or $100,000;
- Have an estimated production period exceeding four months; and
- Have a cost exceeding $200,000.
In summary, the Tax Increase Prevention Act of 2014 provides some significant benefits to purchasers of new aircraft by extending 50-percent bonus depreciation for qualified property. Aircraft that do not qualify as either LPPP (including transportation property) or Certain Aircraft must be acquired and placed in service prior to the end of 2014. For LPPP (including transportation property) and Certain Aircraft to utilize the extended placed-in-service year of 2015, a written binding contract to purchase the aircraft must be in place prior to the end of 2014.