How bonus depreciation and increased expensing limits can make good business sense.
These stressed economic times make it easy for many of us to quash ideas of buying an airplane. But if you can justify business use of a general aviation airplane, there are tax incentives that can change your way of thinking. As part of the American Recovery and Reinvestment Act of 2009—more commonly known as simply the “Stimulus Package”—owners who use their aircraft in business can use a bonus depreciation provision to offset taxable income.
Depreciation is an accounting method used to factor in the reduction in value of capital assets, such as real estate, machinery, and airplanes. It’s also a way of spreading the cost of an asset over a period of time—usually six years . Generally speaking, there were two main ways you could depreciate a big asset that generates income: Straight-line and accelerated. With straight-line depreciation, the asset’s value is divided equally over a period of years. For aircraft operated under FAR Part 91, straight-line depreciation takes place over six years. Each year, you’d deduct a certain percentage of the asset’s value from your business’s taxable income. With accelerated depreciation, you can take more depreciation in the first couple of years, then taper off the balance until the end of the time frame.
To qualify for the accelerated method of depreciation, your aircraft must be used for business more than 50-percent of the time. Some tax experts recommend that the aircraft be used for business more than 60-percent of the time—to make a convincing case should the Internal Revenue Service raise issues.
Front-loaded deductions
Think of bonus depreciation as super-accelerated depreciation, and there’s a catch: To qualify for bonus depreciation you must buy a new airplane. Then, you can take 50-percent of the asset’s purchase price in depreciation in the first year. For a 2009 Cirrus SR22 GTS Perspective, which retails for $598,500, that adds up to $299,250 in tax deductions from bonus depreciation in 2009 alone. The balance of the cost is generally depreciated over 5 years, including 2009 regular accelerated depreciation of $59,850. Subsequent years, of course, let you take significantly lower deductions, until the airplane is “written off” in year five.
There can be another important catch, according to Victor Anvick, a California-based aviation tax specialist. “Bonus depreciation is not allowed in most states,” Anvick says. “So for many, the added incentives from the various stimulus acts have been a ‘federal only’ benefit.”
Even so, bonus depreciation is the number-one attraction when it comes to new-aircraft sales these days. “But most prospects and customers new to aviation know nothing about it,” said Boni Caldeira, Cirrus Design’s regional sales manager for the mid-Atlantic states. “And for that matter, many CPAs are afraid to deal with it.” This is just one reason why dealers and brokers refer customers to tax consultants who specialize in putting together financial transactions of this sort.
Caldeira estimates that nearly 40 percent of all his customers use some form of depreciation to offset the costs of owning an aircraft. “It’s kind of like having the IRS as your partner, paying for 40 percent of your airplane—but not flying it,” he says.
Bryan Hoffman, president of Sun Electric, a Texas electrical construction firm, bought a 2008 Piper Malibu Matrix, then put $500,000 worth of bonus depreciation against his company’s income. “I already bought a Hawker-Beechcraft Baron using bonus depreciation, and I’m looking to trade up because they’ve extended the bonus for another year,” Hoffman said. “I’ll use a chunk of the writeoff to make the down payment.” Hoffman’s flying is almost completely for business travel, so meeting the 50-percent-business-use threshold isn’t a factor.
There’s more to bonus depreciation than buying an entire new aircraft. The bonus also applies to new improvements to used aircraft. New avionics, engines, and winglets would apply, for example. New components in an overhauled engine would also apply—for example, new turbine wheels in a rehabilitated engine.
No free lunch
Bonus depreciation is great for sales, and for customers with so much business income that they need up-front deductions quickly. But there are some caveats. One is that bonus depreciation may not be around forever. It was first enacted for the 2008 tax year, then extended to 2009. The current rules expire on December 31, 2009. Most airplanes bought in 2009 can still qualify you for the bonus—even though the airplane may not be delivered this year, as long as there is a binding 2009 contract and it is placed in service in 2010.
For those who plan to buy an airplane in 2009 using bonus depreciation, then upgrade to another airplane in the same year, remember that you can’t hit the IRS up for two full bonus depreciations. In other words, you can only carry over the amounts you haven’t yet depreciated. If you bought an airplane costing $500,000, took $250,000 in bonus depreciation, then sold the airplane and bought another new one for $700,000 you’d only be allowed the next bonus depreciation to the amount of $250,000—not the full, $350,000 amount. In this way, the IRS penalizes you by not granting the maximum depreciation the next time around.
Holding companies
For tax advantages and to protect their companies from liability, a common tactic is for an owner to put an airplane in a holding company. “The company makes no income, it just leases the airplane back to me,” Hoffman said.
William Perkins, a California venture capitalist, uses another strategy for maximizing the business use of his 2008 Bombardier Challenger 605. “I put it in a Part 135 charter operation, and then allow that company to lease it out. Meanwhile, I guarantee that I’ll use it a certain number of hours per year, and have to do a certain amount of management in order to keep my depreciation,” Perkins said. Perkins said that he used to use shares in fractional operator Flight Options for business travel, but for trips with three or more legs, or on international trips, using the Challenger makes more sense. The bonus depreciation sealed the decision. “I don’t think I would have bought it without the bonus,” he said.
Used airplanes
Tax considerations can also benefit buyers of used airplanes. You may not be able to qualify for bonus depreciation, but you can still use accelerated or straight-line methods for tax deductions—again, as long as the airplane is used 50-percent or more for business.
It’s also worth mentioning that bonus depreciation has had an effect on the used market—one that works to the buyer’s advantage. Because bonus depreciation makes it easier to buy new, owners are shedding their old airplanes. This makes for an increased supply of used airplanes, and lower prices.
Deducting expenses and taxes
The costs of operating an airplane can also be deducted, which can also soften the sting of ownership. While depreciation is used for large capital items over several years, expenses are handled differently. Expenses are one-time, annual tax deductions for costs such as fuel, hangar rental, maintenance and inspections, engine overhauls, and even the cost of additional pilot certificates and ratings.
For those buying new airplanes, IRS Section 179 expensing rules let owners deduct up to $250,000 worth of aircraft-related expenses in 2009. That’s way up from the 2007 limit of $133,000 and 2005’s $105,000.
“Section 179 expensing is also limited or not allowed in many states,” Anvick asserts.
See an expert
It goes without saying that the language of any business or leasing contract be correct in order to avoid problems and take full advantage of any deductions. That’s why it’s vital that you seek a tax consultant who specializes in aircraft. Two prominent firms in this field are: Advocate Consulting Legal Group PLLC, 3073 Horseshoe Drive South, Suite 210, Naples, Florida 34104; telephone 888/325-1942, and Aviation Tax Consultants, 9224 Raintree Drive, Columbus, Indiana 47201; telephone 800/342-9589. Victor Anvick is with the ATIS Group LLC, 1850 Shadow Canyon Road, Acton, California 93510; telephone 661/269-9441.
While the economic mood may be gloomy, there still some very good reasons to buy now. If you call on customers at distant locations, want to explore opportunities for business expansion, and need to make yourself available to prospects in another state, there may never be a better time to buy new.
E-mail the author at [email protected].
Buying the dream
Dialing for dollars
Depreciating an airplane purchase is one thing, but in order to qualify you first have to buy one. AOPA makes this easy through one of its member products, the Aircraft Financing Program, which is run by Bank of America. The program has proven popular since its inception as AOPA’s preferred lender in 1996. A spokesman for Bank of America said that AOPA aircraft loan applications were “through the roof” right now, with more than 100 loans pending approval as of mid-June, 2009.
Applying for a loan is easy. Simply go online and fill out the application. It normally takes one day for approval, and then a loan officer will contact you by telephone with additional items to complete the transaction.
Loans can be for any amount between $10,000 and $5 million, with maximum terms of 20 years. There is a loan calculator at the Web site. As an example, for an airplane costing between $100,000 and $249,000 and with a 10-percent down payment, the interest rate is 6.45 percent. What’s more, your AOPA membership dues are paid for the life of the loan. —TAH
