- 21 Apr 2022
- Andre Fodor
- Aircraft Ownership
Looking to take advantage of 100% Bonus Depreciation in your next business aircraft acquisition? With time running out, what’s your best strategy? Leading aircraft brokers Jim Donath, Johnny Foster and Janine Iannarelli share with Dave Higdon...Back to Articles
Though it’s not a celestial alignment, it has a lot of people looking to the heavens while their financial people pull together the data needed to claim a sun-setting tax deduction while they still can. 100% Bonus Depreciation is due to end at midnight, December 31, 2022. As of January 1, 2023, the incentive drops to 80%.
Unless the buyer already possesses their new aircraft, or is ready to act very soon on their intention to purchase one, the mere act of buying and taking delivery may take more time than remains in 2022 – especially for those failing to account for some of the challenges faced by the industry at this time.
“Supply of inventory remains the business aircraft sales industry’s big challenge,” notes Johnny Foster, President and CEO of OGARAJETS. “Despite an approximately 30% rise in overall supply over the previous 90 days [as of early July 2022], most make/model markets still have only 2-3% of fleet available for sale. Historically, this figure hovers around 10% in a balanced market.
“On the new side, the OEMs have full order books on most business aircraft makes and models for at least the next 24 months. Several models are pushing into 2025 now before a buyer placing an order today could expect to take delivery of their new airplane.”
Capitalizing on the available 100% depreciation requires buyers to take delivery of their aircraft, and conduct one business flight, before the clock strikes midnight on New Year’s Eve, according to Janine Iannarelli, Founder and President of Par Avion Ltd. So, what is a buyer to do with time running so short, especially with the scarcity of pre-owned inventory on the market right now?
“Pre-owned aircraft buyers wanting to take advantage of Bonus Depreciation in 2022 should become active immediately, if they haven’t already,” Jim Donath, President of Donath Aircraft Services, says. “Even though inventory is on the rise, it remains low on an historic basis, and acting sooner, rather than later, is likely to present buyers with more opportunities.”
“It is not too late to take advantage of 100% Bonus Depreciation as pertains to an aircraft purchase,” Iannarelli assures. “However, if you have not secured an aircraft by October 1, I would start to become a bit concerned whether or not you could follow a traditional path to a purchase and conclude the sale by December 31.”
Iannarelli also highlights that while 100% depreciation is available in this calendar year, “depending on the use of the airplane, buyers may not qualify to take the full deduction" – for example, buyers purchasing a jet primarily for personal and/or leisure travel will not be eligible.
“It’s important to understand what qualifies or disqualifies you to benefit from Bonus Depreciation and not just assume it applies to you. This is just one of many examples where having an experienced broker represent you pays.”
Both Donath and Iannarelli highlight access to MRO shops could be the prohibitive factor for those cutting their margins too fine.
“A limiting factor that buyers will face in the fourth quarter is capacity at service centers for pre-buy inspections – planning for that now is critical,” Donath warns. “Buyers should anticipate more time being required for an inspection to take place, and for discrepancies to be corrected in order for the aircraft to be returned to service.”
“Right now, lead time for input to an OEM service center can be as long as 8-10 weeks for a pre-purchase inspection,” Iannarelli highlights. “That being said, there is a number of FAA approved maintenance facilities – as long as they are authorized to work on a particular make and model of airplane – which buyers can turn to.”
“Some buyers were forced to limit, or even skip, pre-buy inspections last year,” Donath adds. “This should be avoided wherever possible, and the best way to do that is start the acquisition process, including pre-buy inspection planning, immediately.”
The Role of Bonus Depreciation in the Market Surge
Anyone familiar with Business Aviation over the past five years almost certainly understands that tax law changes four years ago helped trigger the boom in private jet demand that continues today.
Demand for pre-owned aircraft shot off the scale over the past three years, due to the growing realization of Business Aviation’s benefits during the Covid pandemic that brought many first-time users to the table, many of whom have since become first-time owners.
The elevated demand in recent years, however, may not have been as pronounced without the added tax incentives. To gauge the impact on business aircraft sales one needs only digest the sales figures and ask the dealer/broker community about the correlation.
“[100%] Bonus Depreciation steadily gained favor since becoming available in 2017,” Foster explains.
“By 2021, the combination of a strong desire to return to travel but in the safety and convenience of a private aircraft, ridiculously low interest rates, and 100% available depreciation were simply too hard for buyers to pass-up, creating a surge from first-time buyers. (Some estimates are that as many as 30% of buyers in 2020-2022 are first-time owners.)
“With all that said, we are finding many of our clients are unable to take all 100% in Year One, or are finding there are fewer benefits in doing so. Instead, they’re opting to utilize the more traditional Modified Accelerated Cost Recovery System (MACRS) schedule.”
The MACRS depreciation method allows for larger deductions in the early years of an asset's life, and lower deductions in later years. For example, for Part 91 (private) owners this tends to take place over a five-year period, whereas Part 135 Charter operators will depreciate over a seven-year period.
Prediction: Busy Final Quarter
Ultimately, business aircraft sales have held-up for much of the past decade, defying the ups and downs of the general economy. But in the world of the here-and-now, other influences are coming to bare, challenging the world markets in several areas. What lies ahead over the remainder of the year in the pre-owned market?
“I believe Bonus Depreciation will be a factor in the pre-owned market in the fourth quarter, but different than the last two years when it accelerated market conditions,” Donath shares. “The difference is that in those two years, the market had significant tailwinds. This year, the market is facing headwinds – primarily, the economic outlook.
“Despite these headwinds, buyers will want to take advantage of bonus depreciation in 2022, before the incentive recedes to 80% on January 1, 2023.”
Foster also expects a significant surge of activity in the final quarter, as buyers race to take advantage of 100% depreciation before year-end. But if buyers miss the deadline for 100% depreciation, “the dilution of available depreciation still remains up to 80% in Year One, which is almost four times the traditional method,” he concludes. “That’s still very attractive.”
For those still hopeful of taking advantage of 100% Bonus Depreciation, however, Iannarelli highlights a practical first step that will remove unnecessary stress and wasted-time which could cost buyers, ultimately.
“In order to ensure that you are able to secure an airplane and conclude the transaction prior to year-end, make sure you have your team in place well in advance of moving forward on an LOI,” she stresses. “Scrambling to ‘fill in the blanks’ while in the midst of negotiating a deal is not looked upon favorably by the seller, nor does it help you achieve your goal.”
More information from:
Donath Aircraft Services: www.donathaircraft.com
Par Avion Ltd: www.paravionltd.com
AvBuyer was saddened to learn of the death of Dave Higdon in July 2022, aged 73.
Dave had been a highly valued member of the AvBuyer writing team for nearly 25 years, penning several hundred stories during that time. An NBAA Gold Wing Award winner, he was the ‘go-to’ guy, ready and able to handle any aviation-related topic commissioned to him.
Not only was Dave’s understanding and knowledge of all-things aviation truly astounding, but more than a few of the AvBuyer team came to know him as a friend during his years working with us.
Though many will undoubtedly miss him, Dave’s memory will live on for a long time within the Business and General Aviation community. Deservedly so! Rest in Peace, Dave.