More Questions Than Answers BizAv Finance and Tax Issues As this was written- American citizens and businesses were working on their own interpretations of the outcome of the U.S. Presidential election– one that guaranteed a changing of the guard- regardless of who won. At the same time- however- those same citizens and businesses were awash with worries about the future of the markets on which everyone depends. Consumer markets- business markets- industrial markets- from the procurers of ...
More Questions Than Answers BizAv Finance and Tax Issues As this was written- American citizens and businesses were working on their own interpretations of the outcome of the U.S. Presidential election– one that guaranteed a changing of the guard- regardless of who won.
At the same time- however- those same citizens and businesses were awash with worries about the future of the markets on which everyone depends.
Consumer markets- business markets- industrial markets- from the procurers of raw materials to the processors and manufacturers- the folks who own the store shelves- the firms in the business of extending credit for purchases- and the people dependent on the jobs- the adjective most often used behind the word ‘economy’ these days is ‘turmoil.’ But a few things appear as images of certainty behind a veiled curtain of uncertainty- including:
• The continued time and convenience value of private aircraft remains untarnished – even if the financial underpinnings of owners and operators feel wobbly;
• The instruments of finance for aircraft remain functional- if a bit battered;
• The tax benefits of business aircraft ownership remain unchanged and in favor of the user;
• The financial incentives to buy – and to buy now – are among the best in years- but will soon expire.
The fact that the economy remains in the throes of crisis means that more – possibly better – incentives could be coming from the next Congress and the new President of the United States. The renewal of today’s incentives – or all-new incentives with equal or better impact – could be a boon to those companies that serve business aviation with new planes- new engines- avionics- systems- maintenance and the like.
Currently- utilization is down and advanced orders are down. The drop in use impacts FBOs and maintenance shops; the decline in advance orders has no immediate impact- given the historically large backlogs.
Some order holders are reportedly looking to defer or delay their delivery dates – but not yet at a level with much short-term impact. And cancellations are- from what we’re told- minimal given the scope of order books. All these trends look to reverse as times- and confidence- improve. Let’s take a look at the current state of affairs.
THE 2008 STIMULUS PACKAGE
Plenty of people know about the economic stimulus package Congress passed and President George W. Bush signed back last February through the so-called stimulus checks sent to most taxpayers and some with incomes below the threshold for paying income tax.
Those checks – up to $600 per individual- up to $1-200 for married couples – were designed to spark consumer spending on the theory that people buying things would improve the economy. The debate about its effectiveness continues to this day- with doubters holding an edge given the economic implosion that occurred in September.
In addition to the checks for individual taxpayers- another part of the same bill created incentives to invest in aircraft for business use. The minimum-use threshold to qualify for these incentives was set at a low 51 percent. That is- if the aircraft was to be used at least 51 percent of the time for business- the owner qualified for these incentives. Under Section 179 of the stimulus law- the buyer of an aircraft for business use can deduct as a business expense up to $250-000 of the purchase.
Buyers of a new aircraft costing more than $200-000 also qualify for a bonus first-year depreciation of 50 percent of the price of the aircraft. That’s an extra 50 percent of depreciation in the first year on top of the depreciation normally applied to such a purchase. For the business buying a new corporate plane- this latter allowance can be worth millions in the first year of ownership – effectively flattening out the cost of ownership for that year and- to a lesser extent- the next year depending on its cost of ownership and operation.
Many an operator with aircraft on order for 2008 delivery felt like they’d won something akin to a lottery drawing - they signed that purchase contract long ago- at a time when the depreciation rules were less generous – and here- they get a windfall on their 2008 or (possibly) 2009 taxes – up to 80 percent.
Just as with the normal- no-bonus depreciation schedule- the buyer gets to depreciate the aircraft across six years. With the bonus depreciation- however- the largest single write-down comes in the purchase year- with the remaining depreciation available spread out across the remaining five years.
What the bonus-depreciation scheme means to the buyer of- say- a new Hawker Beechcraft King Air C90GT or Socata TBM 850- to illustrate- is a first-year write-down of 60 percent of the price. On a $3.1 million C90GT- that equals about $1.8 million and about $1.7 million on a $2.8 million TBM 850. Depending on the tax rate- the depreciation could reduce taxes by more than a half million dollars.
Although the incentives under this program are due to expire with the end of 2008- in some instances the production of a purchase agreement signed this year for delivery in 2009 can still qualify the buyer. The bonus depreciation- according to tax professionals- can be applied to generate a net operating loss for a company.
The expensing allowed for purchases up to $250-000 are limited to companies that invest in no more than $800-000 in new equipment. And that deduction can not be used to generate a net operating loss. The net game here is that these incentives can greatly lower the aircraft’s costs indirectly by reducing your tax liability.
OTHER APPLICATIONS AVAILABLE
Maybe you weren’t planning on buying an airplane- new or pre-owned- in 2008 or 2009- but upgrading and improving on an existing one. There’s good news for your situation- as well.
Need to upgrade- overhaul or hot-section those expensive engines? The incentives apply. Perhaps you think it’s time to upgrade the panel and move it from the 1990s into the 21st Century. If so- the incentives are applicable here- too- to reduce your costs. Likewise for refurbishing the interior- or repainting - maybe adding an in-flight office structure to allow you to work via Internet and email. Any capital improvement- basically- can qualify. And again- some of this may be available next year with a signed contract qualifying you this year.
THE BAD NEWS/GOOD NEWS
Although these incentives were written earlier this year with the end of 2008 as the expiration date- there exists a considerable body of opinion that Congress and President-elect Barrack Obama will be interested in furthering investment incentives – as opposed to business tax-rate cuts – to continue to spur investment.
As most have noticed- the economy has continued to deteriorate since the 2008 stimulus package became law and its expiration at the end of December is no longer considered well-timed. A simple extension- Washington lobbyists say- is not without possibility – but likely beyond reasonable probability.
Instead- Congress and the new Obama Administration are more likely going to craft a wider range of measures that target economic recovery.
With planemakers in general showing plenty of orders and solid profits- even in this downturn- laws directed at helping them directly may not be an easy sell. Which means- don’t look for either branch of government to be worrying about planemakers and their suppliers the same way they are currently worried about making sure a domestic auto industry survives.
But incentives that target general activity to spur business investments are not unlikely. That means a general stimulus package that rewards businesses for investing in their own growth are likely. Indeed- any stimulus package that rewards companies for investing in new or additional business-necessary equipment should- in turn- help those same planemakers and their suppliers.
None of these steps are on par with the investment tax credits popular in the late 1970s and into the dawn of the 1980s in terms of the incentive value. Under the investment-tax credit mechanism- you could deduct the cost of an airplane from your tax bill- a more-valuable incentive than taking it off your income or depreciating the investment – another form of lowering your income.
The ITC- however- spawned abuses which spawned a glut of output for covered items beyond what the market could normally support. Eventually- these issues and another crisis were the undoing of such incentives. So while many would welcome their return- few predict or expect ITC language to return.
Yet a renewal of incentives and stimuli comparable to this year’s could work to the advantage of every business up and down the pipeline – from the companies who build and equip the aircraft- to those who serve and maintain- and those who provide the finance.
MONEY TO LEND
Conditions are different than even a few months ago- and the companies engaged in the business of financing aircraft purchases have become somewhat pickier. A year ago- if it was airworthy and had residual value- 80- to 90-percent financing wasn’t much of a problem for the qualified.
These days- however- that increased pickiness translates into more constraints on age- down payment requirements and residual value – a target at times as tough to pin as nailing gelatin to a wall.
The rising pool of unsold aircraft brought by a slump in sales of pre-owned aircraft continues to depress values – values slowly eroding for many an aircraft aged 10 and older. So equipment- condition and the lenders’ ability to make the down-payment and ongoing payments over the life of the typical seven-year aircraft loan all factor into the picture.
Nonetheless- lenders are- as they say- standing by for those ready to buy. According to a variety of firms contacted- interest levels are – and have been- for a while – at historic lows. Rates under eight percent for shorter terms are common; rates of seven percent are also available for longer terms.
Longer terms are available- which can lower the monthly cost and increase the interest payment – interest payments which are typically deductible as a business expense- which can help offset the higher total costs.
GROWING CONCERNS FOR OLDER BIRDS
The biggest fly in today’s mulligan stew of aircraft values- finance and sales- seems to be the aging of the fleet. Some lenders are effectively raising the bar on the age of business turbine aircraft for which they’re willing to lend.
Last year and the prior year- finding funds for the 20-year-old Citation or Learjet posed few problems if the airplane had been kept up and in good condition. Late last year- some lenders started quietly changing their rules and policies and gradually the over-20 set became less attractive – in part because of the leading edge of the sales-slump/value shrink equation.
Recently- the bar with some lenders has been raised again to 10 years and insiders are reporting that for some finance entities the new rules may limit loans to aircraft even further. Some say five years is in the offing with lenders who feel they can afford to be picky. Even companies with attractive programs to re-engine- re-panel and refurbish in one fell swoop may find their finance prospects limited to something they can arrange on behalf of customers.
Of course- finding funds for the new hardware is- for the qualified buyer- about as easy today as it was before the phrase “credit crunch” became ubiquitous. In the longer term- many expect finance and tax benefits to improve as the economy regains its footing and begins to work again – with some incentives remaining to help sustain the momentum gained.
And with the business aircraft still able to prove their mettle every day- few doubt that the bumps in today’s market for pre-owned aircraft are demonstrable of value to return with a vengeance. Why? Look no further than the business news on the airline industry. Fewer seats- fewer flights on fewer planes – and soon- with even fewer carriers.
That means the benefits of business aircraft will hold even more appeal than ever into the future.