How To Maximize Aircraft Deductions Before Year-End
As the end of 2022 approaches, tax-efficient growth is on the minds of many business owners. Acquiring a business aircraft for travel is one avenue some are considering – and with 100% bonus depreciation in 2022, it’s a good strategy. However, due to post-pandemic supply chain issues and other delays, many aircrafts may not be delivered by year-end. Thus, as optimistic buyers begin to face the reality of 2023 deliveries, it is important to consider other strategies that can maximize the timing of aircraft depreciation deductions.
2023 Bonus Depreciation Rules
Bonus depreciation, while beneficial, is merely a difference in timing. Absent bonus depreciation, aircraft purchasers will still get their full amount of depreciation, albeit over a longer period. Without consideration of special rules, 80% bonus depreciation may be available in 2023, with the remaining 20% being depreciated on a normal modified accelerated cost recovery system (MACRS) schedule, assuming the tests under section 280F are met. Combining MACRS and bonus depreciation, an aircraft purchaser could be entitled to a deduction of up to 84% of the original purchase price.
Long Production Period Rules
2023 still offers a few methods of achieving 100% bonus depreciation under specific circumstances. Aircraft classified as “long production period” property can still take advantage of 100% bonus depreciation as long as:
- There is a signed contract prior to Jan. 1, 2023.
- The aircraft is used predominately for commercial charter.
- The aircraft has a production period longer than one year.
- The aircraft has a cost of more than $1,000,000.
Unfortunately, most aircraft production periods are shorter than one year and are not commonly used predominately for charter operations. However, the following exception might prove to be more helpful.
Certain Aircraft Rules
Like “long production period” property, “certain aircraft” property can qualify for 100% bonus depreciation in 2023; however, the qualifications are slightly different. To qualify as “certain aircraft” property:
- There must be a signed contract prior to Jan. 1, 2023.
- The aircraft must NOT be predominantly used as transportation property (i.e., not predominately used in charter operations).
- The production period must be longer than four months.
- The cost must be more than $200,000.
- The owner must make a non-refundable deposit of $100,000 or 10% of the purchase price, whichever is less.
In summary, 100% bonus depreciation is a great windfall that creates accelerated deductions, lower income, and income tax savings, but tax decisions should not always drive business decisions. Prior to rushing into a 2022 closing, consider if there are other avenues that could still provide the desired results. It is also imperative to talk with your tax advisor prior to purchasing an aircraft. The utilization of bonus depreciation is not guaranteed and can often become difficult to realize depending on your facts and circumstances without proper planning. Please reach out to your KSM advisor or fill out this form.
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