January 3, 2013
By Jim Moore of AOPA
Tax rules designed to encourage business aircraft purchases and overhauls have not only survived the fiscal cliff debate, but expanded. The legislation passed by Congress Jan. 1 extends so-called “bonus depreciation,” a type of accelerated depreciation, and also increased limits on deductible expenses for business-related aircraft purchases, along with major upgrades and overhauls.
The tax rules benefit businesses making major capital investments, including the purchase of aircraft, and likely saved many jobs, keeping factories—including aircraft factories—working through the worst of the Great Recession. More than 60 organizations and businesses joined forces in 2012 to urge Congress to extend the benefits, and word that legislation passed to avert massive tax increases and forestall spending cuts also includes provisions to extend accelerated depreciation into 2013 and beyond was welcomed by the aviation industry.
“Accelerated depreciation has consistently proven to stimulate sales in difficult economic conditions,” said NBAA President and CEO Ed Bolen. “Given the current marketing environment, we view the continuation of accelerated depreciation as an effective sales incentive.”
Using a combination of bonus and accelerated depreciation, a business aircraft purchaser can claim up to 60 percent of the total depreciation in the first year, for purchases made in 2013 (and into 2014 for some purchases). Prior to the enactment of accelerated depreciation, purchasers could deduct only 20 percent of total depreciation in the first year. Legislation passed in 2010 allowed a buyer to claim 100 percent of depreciation in the first year, which was reduced to 50 percent for 2012 purchases, and will continue at that rate through 2013 (and into 2014 for certain large aircraft purchases). To qualify, an aircraft (or other capital asset) must be used at least 50 percent for business, and accelerated depreciation is only available for the purchase of new aircraft. New avionics, and major overhauls including engine replacement also qualify.
Another tax rule, found under Section 179 of the Internal Revenue Service Code, offers an alternative for buyers who opt to deduct expenses rather than capitalize and depreciate major purchases up to $500,000, a limit that was retroactively applied to 2012 (when the limit previously dropped to $125,000), and extended into 2013, declining to a maximum of $200,000 in 2014. Under prior legislation, the 2013 and 2014 limits would have been $25,000. This rule benefits small businesses (as defined by the IRS) that make up to $2.5 million in total annual asset purchases, and can be applied to both new and used aircraft purchases. The dollar limits are applied to the taxpaying entity as a whole, and can include a mix of various business asset purchases. A qualified accountant should be consulted on the details of depreciation, expensing, personal use, and other details.