You can probably mark April 26, 2017 on your calendar as the date when the first official “shots” were fired in the upcoming “tax reform war”. President Trump released a brief but controversial summary of his proposed changes to the United States Tax Code on Wednesday, and as expected, it was met with mixed reaction. The outline for the plan, which is large on tax cuts and short on details, shows the intent of the Trump Administration to drastically lower taxes for individuals and businesses in the U.S.
The plan proposes reducing the number of individual tax brackets and reducing the corporate tax rate to 15%. The plan also proposes to change the method of taxation as it applies to “pass-through” entities such as LLC’s and S-Corporations. Currently, the net income of those entities passes through to the owners and is taxed at the individual owner’s tax rates. Under the Trump plan, these entities would no longer be pass-throughs and would be taxed at the entity level, or the 15% corporate tax rate.
What’s the trade-off to these big tax cuts? Groups opposed to the tax plan are stating that there is no way to pay for these big tax cuts without increasing the budget deficit to an unmanageable number. Proponents of the plan say that overall increased economic productivity will more than pay for the reduction in the percentage of tax revenue generated. The truth lies somewhere in between.
How does the plan affect people looking to purchase and current aircraft owners? The important question becomes whether depreciation will continue in its current form? It is almost impossible to imagine a scenario where depreciation will not be included in any future tax plans, however it is entirely possible that the accelerated deductions (eg. MACRS, Bonus Depreciation, §179 Deduction) are eliminated in favor of slower cost-recovery deductions. Regardless of the changes to the tax code, all business aircraft owners will need to review their ownership & operation structure to make sure they are getting the most “bang for their buck” in owning an aircraft.
Does the reduction of corporate and pass-through tax rates reduce the benefit received from the aircraft depreciation deductions? On the surface, the reduction of tax rates on business income (corporate, LLC & S-corp) to 15% looks great. But what if you are no longer able to use your depreciation deductions against the higher tax bracket income you are still subject to at the individual level? While Trump’s tax plan reduces the total number of tax brackets, he has not yet provided details about the income thresholds for each bracket. The top individual tax bracket has only been reduced from 39.6% to 35%, so the top wage earners are still looking at a significant tax bill if their income is not coming from a pass-through entity.
The restrictions on pass-through income and losses will be significant to many aircraft owners. If the tax plan allows a choice between passing through income/losses or using the 15% rate, then it will be much easier to structure aircraft ownership to pass those aircraft deductions to the owner individually. However, if the pass-through entity is required to calculate tax at the entity level (15%), then many aircraft ownership structures will need to be re-evaluated to make best use of the deductions.
One thing is certain, the fight to change the tax code is just starting and the Trump plan might be very different from what was proposed yesterday. Aircraft owners that work with us already know that significant changes will require sophisticated tax advice from professionals with aviation specific tax experience. Call FlyWealthServe today for a no-commitment no-cost consultation on your current and future aircraft ownership plans.
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