A recently issued notice of proposed rulemaking from the IRS on the extension and modification of 100 percent bonus depreciation includes key recommendations from NBAA’s formal request for guidance on the deprecation changes passed into law as part of the Tax Cuts and Jobs Act (TCJA).
The TCJA amended the Internal Revenue Code to provide 100 percent bonus depreciation for both qualifying new and used property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027. For tax years after 2022, there is a phase down of bonus depreciation in increments of 20 percent each year for qualified property acquired and placed in service before Jan. 1, 2027.
The extension of bonus depreciation to used property was a significant legislative victory for NBAA, and since passage, the association has requested specific guidance on how the provision applies to business aviation. Under the TCJA, used property can only qualify for bonus depreciation if it was not “previously used” by the taxpayer. In its guidance request, NBAA explained that a taxpayer conducting incidental use of an aircraft, such as chartering or demonstration flights, and then ultimately purchasing the aircraft, should not disqualify the acquisition from bonus depreciation. View NBAA’s formal request for guidance. (PDF)
“The definition of ‘previously used’ in the proposed regulations is very taxpayer-favorable. So long as the taxpayer never owned the property or had the right to depreciate it in the past, the property can potentially qualify for bonus depreciation,” said John Hoover, a partner at Holland & Knight LLP and vice chair of NBAA’s Tax Committee. “An aircraft is considered previously used by the taxpayer only if the taxpayer had a depreciable interest in the property before buying it.”
The clarification regarding “previously used” is important, as it broadens the types of transactions that could potentially qualify for bonus depreciation.
“For example, if a taxpayer leased an aircraft from an owner and decided to buy it, the aircraft could be eligible for bonus depreciation,” explained Glenn Hediger, CPA and president of Aviation Financial Consulting, LLC. “Similarly, if an individual chartered an airplane and later decided to purchase it, it could still be eligible for 100 percent bonus depreciation.”
Another clarification relates to when an aircraft is “acquired” for purposes of bonus depreciation. For example, if a taxpayer entered into a binding written contract with a manufacturer to build an aircraft in July 2017, but “physical work of a significant nature” didn’t begin until October 2017, was the aircraft acquired after Sept. 27, 2017 and thus eligible for 100 percent bonus depreciation?
The proposed regulations explain the aircraft is considered “acquired” no later than the date of a binding written contract to build it, even though physical work on the aircraft and actual delivery may occur later. In the example above, the aircraft would not be eligible for 100 percent bonus depreciation because the binding written contract was entered into prior to Sept. 27, 2017.
“NBAA appreciates the work of the IRS and Department of the Treasury to issue these proposed regulations, and we are grateful to see that their position on application of bonus depreciation to used property is consistent with our guidance request,” said Scott O’Brien, NBAA’s senior director of government affairs.
Taxpayers may rely on the proposed regulations for qualified property acquired and placed in service after Sept. 27, 2017.