2012 100% BONUS DEPRECIATION

November 2011

Category: Business Aircraft - Tax

Author: Jonathan Levy

100% Bonus Depreciation Extended to 2012
(Note: You’ll need to enter into a written, binding contract by December 31, 2011).

Prior to the enactment of the Small Business Jobs Act (SBJA) of 2010, the Internal Revenue Code allowed a 50% additional first-year depreciation deduction for qualified property acquired after 2007 and placed in service before 2010. The SBJA extends the placed in service date for 50% bonus depreciation through 2012 and temporarily enhances the deduction to 100% for certain new property.

For most types of equipment, the 100% allowance applies only to qualifying property acquired and placed in business service by a taxpayer after September 8, 2010 and before January 1, 2012. However, a special carve-out for aircraft extends the 100% rule to certain 2012 deliveries.

SPECIAL RULE FOR QUALIFIED AIRCRAFT (2012 DELIVERIES)
The 100% enhanced bonus depreciation may apply to an aircraft delivered and placed in service in 2012 if it is acquired under a written, binding contract entered into by the taxpayer after September 8, 2010, and before January 1, 2012. For this purpose, the contract must be signed and in writing, and it must not contain any clause that limits the damages available upon breach to any amount less than 5% of the purchase price.

If the aircraft is not to be used in the business of transporting persons or cargo for compensation, then (a) the contract must also provide for a purchaser’s up-front, non-refundable deposit equal to at least the lesser of 10% of the purchase price or $100,000, and (b) the aircraft must have a cost greater than $200,000, with an estimated production period greater than four months.

If the aircraft will be used for commercial air transportation, then to qualify it must either have an estimated production period greater than two years, or a cost of at least $1 million and a production period greater than one year.

A 2012 delivery that fails the above tests for 100% bonus depreciation may, nonetheless, be eligible for the lower 50% bonus depreciation allowed for other classes of property. It should be noted that no aircraft can qualify unless it is predominately used for business flights. For this purpose, at least 25% of usage must fall outside certain of excluded classes of business use such as related-party leasing or usage to provide fringe benefits.

FIRST-YEAR OPT-OUT?
Although bonus depreciation is generally considered advantageous, some taxpayers may desire to slow their depreciation schedule, particularly if they do not have sufficient current income to advantageously use frontloaded depreciation.

A taxpayer electing not to take additional first-year depreciation must attach a statement to his timely filed return indicating that he is electing out of bonus depreciation and the class of property for which he is making the election. Once this decision is made it generally may be revoked only with the written consent of the IRS.

NOT A MINIMUM TAX PREFERENCE ITEM
Although a Part 91 aircraft is generally subject to five-year, double-declining-balance depreciation under the modified accelerated cost recovery rules for regular income tax purposes, it is generally subject to six-year, straight-line depreciation for alternative minimum tax purposes.

For those taxpayers subject to alternative minimum tax, a tax is generally imposed on the difference between the depreciation calculated under the two alternative methods. When an aircraft is subject to bonus depreciation, the amount in excess of the amount normally allowable for alternative minimum tax purposes is not subject to the additional tax. This provision often provides a significant benefit to taxpayers subject to alternative minimum tax.

INTERACTION WITH OTHER STATUTORY PROVISIONS
Besides the general requirements that the aircraft be new, and used primarily in the furtherance of a trade or business, there are several significant traps for the unwary that should be carefully evaluated prior to the acquisition of a qualifying asset. The most common areas of concern include the following:

• The company owning the aircraft must be a bona fide business, and not a hobby;
• The activity holding the aircraft must not be passive for tax purposes, which would prevent deductions from being used to offset other, non-passive income;
• Personal use of the aircraft may result in partial disallowance of deductions;
• Basis and at-risk limitations require special scrutiny when funds are borrowed to acquire an aircraft subject to an immediate write off.

Although the acquisition of a new aircraft may be an effective business tool, the tax benefits must be carefully planned, documented and defended. Federal Aviation Regulations also impact issues related to ownership, registration, operation and compensation. These regulations must be integrated into aircraft tax and liability issues.

Taxpayers are therefore strongly encouraged to seek the assistance of experienced legal counsel in this specialized area of practice.

Jonathan S. Levy, J.D. is Legal Director, Advocate Consulting Legal Group, PLLC. Advocate Consulting Legal Group, PLLC is a law firm whose practice is limited to serving the needs of aircraft owners and operators relating to issues of income tax, sales tax, federal aviation regulations, and other related organizational and operational issues. Mr. Levy can be contacted via email: jonl@advocatetax.com.

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