Originally enacted in 2008 as a temporary measure to help bolster the flagging U.S. economy, bonus depreciation allows a business to deduct 50% of the cost of qualifying property in addition to the normally available depreciation allowance. The bonus depreciation provision applies to qualifying property, including aircraft, bought and placed into service before a certain date, typically the end of the calendar year. Originally set to expire at the end of 2008, bonus depreciation has been reinstated several times as part of year-end “tax extender” bills along with certain other tax incentives. Bonus depreciation was allowed to expire at the end of 2013 due to the government shutdown, and many feared that meant the final death-knell for this popular tax incentive.
However, on December 19, 2014, President Obama signed into law the Tax Increase Prevention Act of 2014 which retroactively renewed a package of popular tax incentives, including bonus depreciation, for the 2014 tax year. While this is good news for businesses that placed new qualifying equipment into service during 2014, this round of tax extenders only applies to tax year 2014, leaving the status of bonus depreciation uncertain for the 2015 tax year and beyond. Thus, at least as it stands now, in order to take advantage of bonus depreciation, businesses must have bought or financed new equipment and put that equipment into service before midnight on December 31, 2014 (the cutoff for the 2014 tax year). However, using prior years as an indication, it is highly likely that Congress will restore these tax incentives for the 2015 tax year as well. Important note: bonus depreciation only applies to new equipment.
Along with bonus depreciation, the Tax Increase Prevention Act also retroactively increased the Section 179 write-off limit to its previous level. Section 179 allows businesses to potentially deduct the entire purchase price of new or used qualifying equipment, including aircraft purchased or financed before the end of the year. As with bonus depreciation, in order to take advantage of the increased Section 179 deductions for the 2014 tax year, the equipment must have been purchased or financed before midnight on December 31, 2014.
While Section 179 is a powerful incentive, Congress has placed limits on the amount that a business can deduct in any given year. For tax year 2014, the maximum total amount that can be written off is $500,000 (up from $25,000 in previous years), and the Section 179 deduction is limited to taxpayers who purchase less than $2,500,000 in capital assets. The Section 179 deduction begins to phase out, dollar-for-dollar, once the purchase price of the equipment exceeds $2,000,000. Thus, Section 179 expensing is only beneficial on aircraft purchases or upgrades less than $2,500,000 in value. Important note: Section 179 applies to both new and used equipment.
Below are several examples of bonus depreciation and Section 179 at work for the 2014 tax year:
|Purchase Price – New Gulfstream G-550||$53,500,000|
|Section 179 Deduction||$0|
|Normal First Year Depreciation||$5,350,000|
|Total First Year Deduction||$32,100,000|
|Cash Savings on Purchase (assuming 35% tax bracket)||$11,235,000|
|Cost of Equipment after tax savings||$42,265,000|
|Purchase Price – New Embaer Phenom 300||$8,000,000|
|Section 179 Deduction||$0|
|Normal First Year Depreciation||$800,000|
|Total First Year Deduction||$4,800,000|
|Cash Savings on Purchase (assuming 35% tax bracket)||$1,680,000|
|Cost of Equipment after tax savings||$6,320,000|
|Purchase Price – Used King Air 200||$1,300,000|
|Section 179 Deduction||$500,000|
|Normal First Year Depreciation||$80,000|
|Total First Year Deduction||$580,000|
|Cash Savings on Purchase (assuming 35% tax bracket)||$203,000|
|Cost of Equipment after tax savings||$1,097,000|
IRS Rules of Practice require us to inform you that advice, if any, in this article concerning federal tax issues is not intended or written to be used, and cannot be used or relied upon by any taxpayer for the purpose of avoiding penalties under the Internal Revenue Code.
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