This post was written in collaboration with Chris Younger, Principal at GKG Law. Chris focuses his legal practice on business aircraft transactions as well as issues relating to federal and state taxation and regulation of business aircraft ownership and operations. Chris is a frequent speaker on business aviation topics and has presented numerous webinars on issues such as bonus depreciation and state sales and use tax. He has also written articles for publications including AvBuyer Magazine and World Aircraft Sales Magazine.
The private aviation industry has experienced an increase in interest over the past few years as a result of new federal income tax provisions included in the 2017 Tax Cuts and Jobs Act bill that allows for 100% “bonus” depreciation of the cost of new or preowned private aircraft in year one of ownership. In this blog post, we’ll unpack the specifics of this tax bill, explain who is eligible for this private jet tax deduction and discuss how to take advantage of this exciting opportunity.
What is the Private Jet Tax Break?
On December 22, 2017, the Tax Cuts and Job Acts of 2017 (TCJA) was signed into law. This Act amends the Internal Revenue Code of 1986 and was designed to reform current corporate income and individual income taxes, as well as move the United States to a territorial system of business taxation.
According to research from the Tax Foundation, the TCJA is projected to do the following:
- Significantly lower marginal tax rates and the cost of capital, thereby leading to a 1.7% increase in GDP over time, 1.5% higher wages and an additional 339,000 full-time equivalent jobs
- Spur an additional $1 trillion in federal revenues from economic growth
- Increase GDP by an average of 0.29% each year
- Increase after-tax incomes of all taxpayers by 1.1% over time
Ultimately, the TCJA heavily revised tax law with the goal of stimulating the economy, simplifying taxes and lowering the tax burden on businesses in the United States. It’s important to note that changes to individual income tax provisions are scheduled to expire after December 31, 2025.
How the TCJA Affects Private Jet Depreciation
You might be wondering, “How is any of this relevant to private aviation?”
Well, you see, together with making significant changes to corporate income and individual income taxes, the TCJA also introduced a change to private jet taxes by enhancing the timing and amount of depreciation of private jets for income tax purposes. Prior to the Act’s passage, corporations and private individuals were eligible to immediately deduct 50% of the purchase price of a private aircraft used for business from their income subject to tax; this “bonus” depreciation deduction was slated to decrease to 30% by 2019. The TCJA increased the bonus depreciation percentage from 50% to 100% in year one of ownership, which means that, when an aircraft is purchased, the owner may be eligible to write off 100% of the expense of that purchase, including acquisition and maintenance costs.
For those who have been considering the option of private aircraft ownership, this is an appealing benefit that could significantly reduce the total cost of ownership and significantly reduce that year’s income subject to taxes.
Private Jet Tax Break Stipulations & Penalties
As with any type of tax break, the private jet tax break comes with certain stipulations, including:
- This new tax rule only applies to private aircraft acquired after September 27, 2017 and prior to 2023 (the bonus depreciation percentage phases out in 20% increments per year after 2022).
- Private jet expenses can be written off only if the aircraft in question is utilized primarily for business purposes.
- To avoid disallowance of any portion of the 100% bonus depreciation, during the first year of ownership, the aircraft should be used only for qualified business purposes. For more specific information regarding this rule, refer to Internal Revenue Code Section 280F, which explains deduction limitations for listed property such as aircraft.
- Following the first year of ownership, in order to avoid recapture of the 100% bonus depreciation, the aircraft must be used at least 50% of the time for qualified business purposes; the other 50% of use can be for personal, purposes.
If you do not follow the stipulations listed above, you could lose the bonus depreciation deduction or, at the very least, a significant portion of it. If you were currently in year four of ownership but did not follow the qualified business use requirement in all years, you could retroactively lose the deduction and be forced to recalculate it for the following years. An additional challenge with this is that you’d also be subject to any interest that accrued on the tax savings from this deduction during the years in which you didn’t abide by the rules.
Hefty civil penalties could also apply — up to 20% to 40% of the tax liability. In any case, whatever the consequence, the legal fees and audit fees associated with a violation can add up quickly, which is why it’s important to work with an expert when exploring these enhanced private jet depreciation opportunities.
How to Make the Tax Break Work for You
If you’re interested in taking advantage of the private jet tax deduction, start by retaining the services of a private aviation consultancy. A private aviation consultant, such as those at Essex Aviation Group, will not only help you determine which private aircraft make and model best meets your unique travel needs, but will also help you to understand which type of operations can meet your requirements and still enable you to take advantage of the federal income tax benefits provided in the revised tax code.
A private aviation consultant can also leverage their industry connections to put you in contact with aviation-specific legal and tax advisors who will work with your in-house representation to:
- Evaluate state sales tax and use tax rates and available methods for avoiding or reducing such taxes
- Structure aircraft ownership and operations
- Maximize aircraft utilization
- Determine aircraft costs and taxation, including income tax planning
- Ensure excise tax compliance
- Handle monthly statements and reporting to track expenses
- And so on
A truly qualified aviation tax advisor will collaborate with your in-house team to set up a cohesive plan that achieves the best state sales and use tax results and income tax results and avoids creating any other tax liabilities.
Should you purchase a private jet, only to discover that you aren’t eligible to take advantage of these income tax benefits, your private aviation consultant will work with you to explore options to address this issue such as a leaseback. Leaseback enables you to sell the asset to a bank, and then turn around and lease that aircraft back from the bank. This can be an ideal solution for individuals who would like to use the aircraft for personal, entertainment-related purposes because it enables the bank to take advantage of the tax benefits that the individual is not able to utilize and provide the individual with a discounted lease rate as a result of the bank’s ability to utilize those tax benefits.
If you’d like to learn more about how the Tax Cuts and Jobs Act of 2017 affects private aviation, or how you can take advantage of the private jet tax deduction, contact the experts at Essex Aviation to schedule a consultation.