AircraftOwner Online

If you are thinking about buying an aircraft for use in your business in 2011, you need to know that the income tax laws have changed recently and, if you follow a whole bunch of complicated rules, these changes can substantially reduce your cost of owning and operating that aircraft.

First, a warning.  I am not a tax attorney.  I know enough about tax to get myself in trouble in a hurry.  Everyone’s tax situation is different, and the rules and regulations change constantly.  If you are contemplating the purchase of an aircraft and are interested in the actual tax consequences that will apply to your situation, you should contact an accountant who specializes in aircraft taxation.  There are several good ones around the country.  Your regular CPA generally is not going to know about any of the special rules relating to aircraft.  Some CPAs may not even know that there is stuff they don’t know.  If you just use your regular CPA, without verifying that he or she knows about aircraft accounting procedures, you are asking for trouble down the road.  Use a specialist.  It is worth the extra expense.  Also, this article is only about federal income tax.  It does NOT address other types of taxes like sales taxes, use taxes, ad valorem taxes, or other similar taxes and fees.

As in most years, favorable tax treatment in 2011 depends upon whether you are buying a NEW aircraft or a USED aircraft.  The treatment for both types of aircraft has improved dramatically over the past years, but it is VERY different between the two types.

In general, there are three types of expenses that we are concerned with in this article:  “standard” depreciation; “bonus” depreciation; and “Section 179” expenses. 

The most-talked-about of these three items is “bonus” depreciation.  The term “bonus” refers to the fact that the income tax laws currently require that aircraft which can be depreciated usually have to be depreciated over a schedule of either five or seven years (depending on the type of use).  At this rate, the taxpayer would not be able to deduct more than about 20% of the cost of the aircraft in the first year of ownership.  Beginning in 2004, as a way to stimulate the economy and create jobs, however, the government began using the concept of “bonus” depreciation, which allowed people who ordered and placed into use new aircraft to “front load” the depreciation deduction in the year they made the cash outlay.  This had the result of stimulating people to buy new aircraft, which, in turn, kept people employed building them.

For 2011, the way in which bonus depreciation works, is that 100% of the cost of new aircraft, and of new equipment added to used aircraft, on contracts entered into on or after January 1, 2008, and placed into service prior to December 31, 2011, may be taken as a depreciation expense in the year of purchase.  If you have a large liability for taxes in 2011, this is huge.  It has the effect of allowing you to deduct the cost of your aircraft from your taxable income, resulting in less tax due for the year 2011, and might even result in a tax refund.  The current law changes in 2012, the “bonus” is not as much, but is still nothing to sneeze at.  Up to 50% of the cost of the new aircraft can be deducted in 2012 if the aircraft is put into service during that year.  There are even some circumstances where the aircraft owner can receive an extension of up to one year (to December 31, 2013) to put the aircraft into service and still write off 50% of the purchase price as “depreciation” in the year the aircraft is placed into service.  Again, this can result in less income taxes due, or even a tax refund.

“Regular” depreciation is applicable for all aircraft which are legitimately used for business (as distinguished from “hobby”; “personal use”; or “entertainment”).  The rules regarding regular depreciation haven’t really changed much.  Depending upon the type of business use to which the aircraft is put, the most you can depreciate in any one year is dependent upon the Modified Accelerated Cost Recovery system (MACRS) formula, which is only slightly “front loaded”.

Section 179 expensing is different.  It allows you to deduct certain regular operating expenses, within strictly controlled limits.  For 2011, those limits have been made much more liberal than they have been in the past.  For USED aircraft, as well as NEW aircraft, a taxpayer who invests up to $2,500,000.00 in an aircraft may take up to the first $500,000.00 in expenses incurred in 2011 as deductible expenses in 2011.  Again, this can have the result of making the cost of purchasing and operating a used aircraft much less onerous, since much of the purchase cost may be recovered in tax savings in year one.  [Although Section 179 expensing applies to new aircraft as well as used aircraft, in MOST cases, it will be more beneficial for the owner of the new aircraft to use bonus depreciation rather than Section 179 expensing.]

In 2012, this expensing will become much less generous.  At that time, unless there is a change made before the rules become effective, only the first $625,000.00 of investment is eligible to be considered for Section 179 expensing.  Only a maximum of $125,000.00 can actually be expensed in year one.  The benefit of Section 179 expensing is phased out for investments in aircraft in excess of $625,000.00