Bonus depreciation continues to impact purchase decisions of many taxpayers. While the general rule is 80% bonus depreciation for business assets, business aircraft may qualify for 100% bonus depreciation in 2023.
If you have signed a purchase agreement prior to 2023 and made a non-refundable deposit of at least $100,000 – you qualify to take 100% bonus depreciation in 2023 when the aircraft is delivered.
Due to an oversight on the drafting of the legislation in 2017, 100% bonus depreciation may be available for any business aircraft acquired in 2023, if you follow the literal reading of the statute as written. Ultimately, your CPA handling your tax preparation and filing will decide whether to rely on 100% bonus depreciation in 2023 due to this technicality.
If 80% bonus depreciation is taken in 2023, the remaining 20% of the acquisition costs will be depreciated over the useful life of the aircraft, which is six tax years for aircraft operated under Part 91.
Something else to look into is “Section 179 Expensing,” which is available for aircraft under a $4.05M purchase price. This expensing provision allows up to $1.16M of the purchase price of an aircraft to be deducted in the year of acquisition. Earned income and non-aircraft equipment purchases can impact the amount of expensing available.
Managing Audit Risks
The last couple of years have seen dramatic changes in the business aviation industry. The pandemic and the inconvenience of airline travel have led to many first-time business aircraft buyers. Tax benefits have played a role in attracting many business owners to acquire aircraft for business travels. With Congress increasing funding of the Internal Revenue Service (IRS), this is a good time to review the audit risk of aircraft ownership and what taxpayers can do to mitigate the risk.
One of the most common questions I address with prospects and clients: “Will I be audited by the IRS because I write off an aircraft?” Contrary to popular belief, it is extremely rare to be picked for an income tax audit by the IRS, even when a business aircraft is involved in your income tax filings. Although, certain reporting scenarios are indeed “high” risk and can draw attention from IRS auditors. The primary objective of our tax planning is to avoid aircraft ownership structures that “stick out like a sore thumb” and are more likely to draw IRS attention.
For example, reporting an aircraft on Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship) with sizable tax loss due to bonus depreciation will be an invitation for an IRS examination. Similarly, an aircraft holding company filing as an S corporation (Form 1120-S) or a Partnership (Form 1065) reporting a significant tax loss will also generate unnecessary interest from the IRS.
Even though it is a rare occurrence, we strongly recommend that our clients keep extremely detailed records to support the business use of their aircraft. Personal use of a business aircraft should also be handled based on the nature of the personal use. If you are audited, the key to success is your ability to establish that the aircraft is ordinary and necessary to support your business activities, and be able to support this claim with contemporaneous documentation, which includes detailed flight log records. Emails and calendar entries to collaborate that a business meeting took place will be very effective.
Managing state sales tax audit risk
Unlike IRS income tax audits, state sales and use tax audits occur on a regular basis. In some states, it is a certainty that an aircraft owner will receive a sales/use tax inquiry from the State Department of Revenue after the purchase of an aircraft. Therefore, if you are claiming a sales tax exemption on the purchase of an aircraft, you should be prepared to present documentation and flight logs to support the exemption claimed.
With the advancement of flight tracking websites, and the common requirement of state aircraft registration, it is highly unlikely that you can avoid scrutiny of your aircraft from state taxing authorities by utilizing a Delaware or Montana LLC. I refer to this state tax avoidance strategy as playing a game of “hide and seek.” If caught, you will owe tax on the purchase plus penalty and interest.
State sales and use tax planning varies greatly from state to state. Some of the more common exemptions that may be available are:
- Interstate commerce exemption
- Occasional or private party purchase exemption
- Rental and leasing exemption
- Commercial charter use exemption
- Due to the mobile nature of aircraft, it is important to determine if your aircraft may be subject to the jurisdiction of multiple states, such as the state of a second home or office locations.
Daniel Cheung is a principal of Aviation Tax Consultants, LLC (www.aviationtaxconsultants.com), which is celebrating its 20th anniversary in 2023. ATC’s consulting services include the elimination or reduction of sales and use tax, maximizing income tax savings, controlling the cost of personal use of the aircraft, complying with passive activity loss and related party leasing rules and Federal Aviation Regulations. Cooperation with client’s current tax and legal advisors is welcome and encouraged.