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New Tax Changes for Aircraft
By CharlesIf 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
2010 Legal Proceedings: A Retrospective
By CharlesAs many of you know from prior issues of this column, getting statistics about FAA administrative proceedings against pilots is very difficult. The only place where good statistics are available is from the ultimate administrative appellate body, the NTSB, which hears appeals from FAA Orders against Certificate holders.
In 2010, there were a total of 62 such appeals. Of those, 7 cases were cases where the substance of the matter had been heard before and either a judicial appeal was taken to the United States Court of Appeal (3 cases), or where the Certificate Holder had filed a request for reimbursement of a portion of his or her attorneys fees under the Equal Access to Justice Act (4 cases). Three other cases were sent back to the Administrative Law Judges for further proceedings without a finding for either party (“remanded”). Four other cases dismissed the Airman’s Appeal for being untimely without reaching the merits of the matter. In five other cases, the Administrator’s Petition to have the decision of the Administrative Law Judge reconsidered, the NTSB refused to reconsider the matter. In one other case, where the Airman petitioned the NTSB to have the decision of the Administrative Law Judge reconsidered, the NTSB refused to reconsider the matter. In two other cases, an Airman’s request for a stay of the Order of the Board pending judicial review by the United States Court of Appeal was granted; in another it was denied. In one case, the Law Judge had refused to grant the FAA’s Motion to Dismiss the Airman’s appeal because the Airman allegedly didn’t file his appeal in time, was reversed and the Airman was not allowed to proceed to the merits in the case below. 11 cases involved appeals which were either withdrawn or not perfected. One other case was settled. This leaves 26 cases in which cases were decided on the basic merits of the argument of the parties.
Of those 26 cases, 9 were cases that were brought by the Administrator under the FAA’s “emergency” powers. All of those cases were decided in favor of the Administrator and against the Airman. The remaining 17 cases, all went, in one form or another, against the Airman, as well. Although in a few of those cases, the sanctions recommended by the Administrative Law Judge were reduced, all of the Airmen whose appeals to the NTSB were heard on the merits, wound up with their Certificates revoked or suspended for some period of time.
It is also interesting to note that, in the last three or four years, the NTSB legal staff has managed to whittle down its entire backlog of appeals such that there is relatively little delay between the date that an appeal is taken from an Administrative Law Judge and the date that an Opinion is published by the NTSB. This benefits all concerned, as it provides closure for disputes.
You should also be aware of the fact that the NTSB is considering changes to the rules governing “emergency” proceedings. According to the Press Release,
“The ANPRM [Amended Notice of Proposed Rule Making] indicates that certain parties have approached the NTSB concerning emergency certificate actions, which involve cases in which the FAA issues an immediately effective order revoking or suspending a certificate. In such cases, the NTSB’s procedural rules allow a party to challenge the emergency status of the case, and provide an expedited timeline for doing so. The rules currently require the NTSB’s administrative law judges to ‘consider whether, based on the acts and omissions alleged in the Administrator’s order, and assuming the truth of such factual allegations, the Administrator’s emergency determination was appropriate under the circumstances.’ The ANPRM invites public comments concerning this standard of review, as well as other aspects of the emergency review process, such as whether a hearing should occur to allow parties to provide evidence concerning whether the case should be treated as an emergency. The ANPRM further invites comments concerning whether parties should have an opportunity for another level of appeal to challenge the emergency status determination.”
For information on how to make a formal “comment” during the “comment period, please contact me and I will assist you so that your voice can be heard on this important matter.
