Understanding How Tax Code Relates to Specific Situations
One of the comments I hear most frequently from taxpayers is that they are reluctant to take the large tax deductions that they are entitled to, in the form of 50% Bonus Depreciation and the $500,000 §179 Deduction, because they can’t reach the 50% Business Use threshold. Unfortunately, these taxpayers, and often times their tax advisers, are not educated on the Treasury rules that are specific to bonus depreciation and as it relates to aircraft bonus depreciation. The reality is that most taxpayers will far exceed the 50% threshold of business use and not even realize they are doing so, because their business use is not being calculated correctly.
In 1984, Code Section 280F of the Internal Revenue Code was enacted to prohibit taxpayers from using the very beneficial modified accelerated cost recovery schedules (MACRS) to depreciate assets that frequently are used for business and/or personal use. These types of assets are called “Listed Property” and are assets such as certain motor vehicles, photographic equipment, computer equipment, and aircraft. The Code required that listed property must be predominantly (more than 50%) used for qualified business use, in order to qualify for MACRS depreciation.
The available 50% Bonus Depreciation deduction and the $500,000 §179 deduction that are available to taxpayers are both subject to the “more than 50%” MACRS rules. If a taxpayer is under the “more than 50%” threshold, they may not deduct the Bonus Depreciation or §179 deduction and are subject to using the considerably slower “straight line method”. Many of the prospective aircraft owners that we speak to, do the math in their head and worry that they may be cutting it close. However, we make sure to educate our clients, so that they understand how the 50% business use is actually calculated for business aircraft and we warn them if the possibility of falling below the threshold is likely to occur.
Congress also included some additional language that could trap many sophisticated tax advisers, who would structure asset ownership to take advantage of loopholes in the law. The rule that would have had the most impact on many asset owners disqualified business use any time the property was leased to any 5% owner or related person. Luckily, a small exception was included in the code that stated when the property is an aircraft, if at least 25% of the total use of the aircraft was for qualified business use, then the leasing or compensatory flights for a 5% or more owner could be treated as qualified business use.
This is a huge exception for business aircraft owners, because now, if your aircraft ownership is structured correctly, you are able to include certain personal flights in the calculation to reach the “more than 50%” threshold that triggers the ability to use aircraft Bonus Depreciation and the §179 deduction.
Aircraft Bonus Depreciation Examples
Example 1: Taxpayer A owns ABC, LLC and purchases an aircraft for $1,000,000 in October 2016 to be owned by ABC Aviation LLC. He calculates his use in 2016 to be 37% Business flights, 28% Personal Non-entertainment flights, 25% Personal Entertainment flights and 10% Maintenance flights. Without the exception, Taxpayer A would only reach 37% qualified business use and not be eligible to use Bonus Depreciation or the §179 deduction in 2016. Taxpayer A’s allowable depreciation in 2016 would only $83,300.
Example 2: Same facts. However, with the exception for aircraft in place, he/she is allowed to add the Business (37%) and Personal Non-Entertainment (25%) flights to reach 62% qualified business use and easily exceed our “more than 50%” threshold. The taxpayer may now take advantage of the both accelerated first year deductions, which results in an allowable deduction of $762,500 in 2016 on that same $1,000,000 aircraft. Big difference!
The examples above are being presented as an example of the benefits that are available to taxpayers that own or want to purchase business use aircraft. You should utilize the services of an educated aviation tax professional for your specific situation and not rely on these calculations alone. Aviation taxation is a complex area that typically goes beyond the capabilities of most tax return preparers and there is no “cookie cutter” solution that fits every taxpayer. FlyWealthServe specializes in aviation taxation and works with your tax attorneys and CPA’s to provide a custom solution to your specific tax needs.
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