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While accounting rules regarding the treatment of capital investments differ between countries- the concept of depreciation knows no borders. Keith Swirsky and Troy Rolf examine the law as it applies now in the U.S.

AvBuyer   |   1st February 2011
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Bonus Depreciation Overview
While accounting rules regarding the treatment of capital investments differ between countries- the concept of depreciation knows no borders. Keith Swirsky and Troy Rolf examine the law as it applies now in the U.S

Bonus Depreciation- a term used to denote write-off of an asset at a faster pace than typically allowed- was written into the U.S tax code in 2001 to help boost the nation’s economy. Congress subsequently revived the Bonus Depreciation incentives (albeit on a short-term- temporary basis) as part of the Economic Stimulus Act of 2008.

Since then- the deadline for placing “Qualified Property” in service has been extended several times- most recently by the Tax Relief- Unemployment Insurance Reauthorization- and Job Creation Act of 2010.

Bonus Depreciation grants a special tax depreciation allowance for taxpayers who place certain Qualified Property in service in the years 2008 through 2012- or- in some cases 2013. For most Qualified Property- the allowance is 50% of the adjusted basis of the Qualified Property- but the allowance is 100% for Qualified Property placed in service between September 8- 2010 and December 31- 2011.

It’s important to note that Bonus Depreciation does not increase or change the total amount of depreciation (typically 100 percent) a taxpayer will be entitled to claim over the depreciable life of an asset. Rather- Bonus Depreciation allows taxpayers to deduct a larger portion of the cost basis of an asset in the year that the asset is placed in service than would otherwise be allowed.

To be deemed “Qualified-” property must meet the following requirements:
• Have a tax recovery period of 20 years or less (e.g.- aircraft);
• Be placed in service by the taxpayer after December 31- 2007;
• Be (a) acquired by the taxpayer after December 31- 2007- and before January 1- 2013- but only if no “Written Binding Contract” for the acquisition was in effect before January 1- 2008- or (b) must be acquired by the taxpayer pursuant to a Written Binding Contract which was entered into after December 31- 2007- and before January 1- 2013; and
• Be placed in service by the taxpayer before January 1- 2013- or- in the case of “Certain Aircraft” or “Property Having Long Production Periods”- before January 1- 2014.

In addition- in order to qualify for Bonus Depreciation- the property must be depreciable under the Modified Accelerated Recovery System (MACRS) - property that is not eligible for MACRS will not be eligible for Bonus Depreciation.

The deadline for placing in service “Certain Aircraft” and “Property Having Long Production Times” is December 31- 2013. Depending on circumstances- a business aircraft could qualify under either the “Certain Aircraft” provision- or the provision governing “Property Having Long Production Times-” or neither provision. The following definitions are relevant only to property placed in service in calendar year 2013.

The term “Certain Aircraft” refers to Aircraft (a) that are not “Transportation Property;” (b) on which such purchaser- at the time of the contract for purchase- has made a non-refundable deposit of the lesser of 10% of the purchase price- or $100-000; (c) that have an estimated production period exceeding 4 months; and (d) that costs more than $200-000.

The statute defines “Transportation Property” simply as tangible personal property used in the trade or business of transporting persons or property. This probably includes business jet aircraft that are used in on-demand charter operations. However- no definitive guidance yet exists to determine whether a specific aircraft is or is not “Transportation Property.”

This refers to property that satisfies each of the following four tests:
1) The property must meet all the requirements of “Qualified Property” discussed above;
2) The property must either have a recovery period of at least 10 years- or be “Transportation Property;”
3) The property must be subject to IRC Section 263(A) (which applies to real or tangible personal property produced by the taxpayer); and
4) The property must meet the requirements of clause (iii) of section 263A(f)(1)(B) (determined as if such clause also applied to property which has a long useful life (within the meaning of section 263A(f))).

The aforementioned Clause (iii) of section 263A(f)(1)(B) requires that property have a cost exceeding $1-000-000- and have an estimated production period (i.e.- the time from the date production actually begins until the date the aircraft is ready to be placed in service) exceeding 1 year.

This last requirement eliminates many corporate-class jets from qualifying for Bonus Depreciation under the “Property Having Long Production Periods” provision because only large cabin class corporate jets actually have production periods exceeding 1 year. For “Property Having Long Production Times-” only that portion of the cost basis of the aircraft that is attributable to production before January 1- 2013 qualifies for Bonus Depreciation.

Used aircraft- including rebuilt and reconditioned aircraft- do not qualify for bonus depreciation. However- the cost of new upgrades and improvements (e.g.- new engines and new avionics) purchased by a taxpayer for an aircraft the taxpayer already owns can qualify- but if the taxpayer purchases a used aircraft after the upgrades and improvements have been made- the aircraft will be considered rebuilt or reconditioned and no part of the total acquisition cost will qualify.

New aircraft used by an OEM or dealer for demonstrator purposes prior to sale to a customer should qualify for Bonus Depreciation. In such situations- the Original Use of the aircraft is considered to be by the taxpayer and not by the dealer or manufacturer.

The above Article provides only a brief overview of the ins-and-outs of Bonus Depreciation. Anyone purchasing an aircraft with the expectation of being entitled to Bonus Depreciation should consult with an aviation attorney or tax advisor familiar with the rules governing Bonus Depreciation.

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