Christopher Durst, Senior Tax Advisor
The current availability of tax benefits like 50% Bonus Depreciation and the §179 expensing election along with the potential for a large-scale overhaul of the United States tax code, could lead to a “perfect storm” of tax savings for aircraft purchasers in 2017. If the Trump administration is able to push the President’s plan for tax code overhaul through Congress, the lower tax rates in future tax years along with a significant tax savings in the current year, could result in an even bigger benefit to buying a business use aircraft this year, before the changes take place.
Phase Out Starting in 2018
Under the current tax code, the 50% Bonus Depreciation available in 2017 for business aircraft being placed in service is being phased out starting with the 2018 tax year. The phase-out would begin with a reduction of Bonus Depreciation in 2018 from 50% to 40%. In 2019, Bonus Depreciation is further reduced to 30% and eliminated altogether for the 2020 tax year. If a taxpayer is already “on the fence” about making a new aircraft purchase, the upcoming changes to Bonus Depreciation are a serious consideration on the timing of that aircraft purchase.
While the benefits of Bonus Depreciation and §179 have been set to expire each year since 2012 only to be renewed by Congress, there is good reason to believe that the phase-out that was passed into law in 2015 will be allowed to take place this time around. There is even the possibility that Congress could choose to completely do away with the accelerated depreciation incentive after the 2017 tax year, if a substantial overhaul of the tax code that is being promised by President Trump’s administration takes place. Even if an overhaul would not occur, the current timeline for the expiration of these benefits places a new sense of urgency on business owners trying to decide on an aircraft purchase.
Trump’s Grand Tax Plan
The Trump administration has proposed a plan that would reduce taxes across the board for businesses and individuals. In years past, tax system overhaul plans always faced the hurdle of a divided legislature. However, with control of the House and Senate resting comfortably in the hands of the Republican Party, the likelihood of a reduction in taxes is high. Only time will tell how significant the changes will actually be, but we can speculate that some aircraft owners could end up in a “perfect storm” of tax savings based on current tax law and the proposed changes for businesses and individuals.
The changes to the tax code that President Trump has proposed would reduce the number of individual tax brackets to three rates (12%, 25%, & 33%), which would reduce the current top individual rate from 43.8% (39.6% rate plus Net Investment Income Tax of 3.8%) to 33%. The plan would also reduce capital gains and qualified dividends to a max rate of 20% from the current max capital gains rate of 43.8% for short term and 23.8% for long term capital gains. While there is a great opportunity for everyone to save on their individual taxes in this plan, the big savings could be realized by high-income earners with the change in the corporate income tax rates.
Currently, the maximum corporate tax rate is 35%. The proposal from President Trump would reduce the corporate rate to a flat 15%, which would be a boon to corporations in the United States which have always faced the challenge of competing globally while having one of the highest corporate tax rates in the world. While this is a significant strategy to improve the profitability of corporations, the current plan also proposes that flow-through entities (LLC’s, Partnerships, S-Corps) could pay the same tax rate of 15%, that corporations would be paying. This would be a monumental change to the tax code for taxpayers that are paying taxes on flow-through income at their individual rates, sometimes as high as 43.8%!
While it will likely be this summer (2017) or later until we have a true idea of what actual changes will take place in the tax code, there is no doubt that current tax benefits available to aircraft purchasers coupled with the potential changes on the horizon should leave purchasers of business aircraft optimistic that they will have a significant tax benefit from the ownership of a new aircraft.
Huge Benefit to Aircraft Purchase
The current tax environment for business aircraft owners provides the opportunity to purchase an aircraft, new or used, and deduct a significant amount of the acquisition cost in 2017. With the top tax rate at 43.4% on ordinary income for high-earners, every deduction counts in reducing what could amount to a massive tax burden at the current rates. Another way that a significant reduction in tax rates in the future could benefit aircraft owners now, is the ability to reduce taxable income that is taxed at the current higher rates and only be subject to the lower rates when the recapture of depreciation occurs in the future at time of sale. Currently, if an aircraft owner in an LLC, Partnership, or S-Corporation is forced to recognize a gain from recapture of depreciation at time of sale, they are recognizing that gain as ordinary income and paying tax at their ordinary income rate (as high as 43.4%).
Under the proposed changes to the tax code made by President Trump, ordinary income from LLC’s, Partnerships, and S-Corporations would be taxed at the new corporate rate of 15%. If an aircraft owner is able to deduct depreciation on the acquisition cost of the aircraft now and use the deductions against income taxed at a 43.4% rate and then only be subject to a 15% tax rate on the recapture of depreciation when the aircraft is sold, the net tax savings of 28.4% would be huge for the taxpayer.
While there are no guarantees that there will be a major overhaul to the United States Tax Code, Trump has proven capable at defying the odds up until now and the prospect of significant change is as good as it has ever been. If you have ever considered an aircraft purchase or have been trying to find the right time to make your aircraft purchase, this may be the best opportunity in a decade to capitalize on the tax benefits to make that purchase.
You should utilize the services of an educated aviation tax professional for your specific situation. 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 CPA to provide a custom solution to your specific tax needs.