KJ McCarter, CPA
The Tax Cuts and Jobs Act (TCJA) enabled 100% bonus depreciation for eligible property purchased and placed in service after September 27, 2017 and before January 1, 2023. During this period, businesses could depreciate the full purchase price of their aircraft in the year the aircraft was acquired and placed in service. For example, a business with $2M of taxable income in 2022 could purchase and place in service a $1M aircraft in 2022, take 100% bonus depreciation on the aircraft, and push taxable income for the year down to $1M.
In 2023, the bonus depreciation rate has generally phased down to 80%. Under current tax law, the bonus depreciation rate will continue to decrease 20% each year until it completely phases out in 2027. This reduction to 80% and gradual phase down structure has led to many questions from our clients. What happens to the remaining 20%? Is this 20% simply lost? Do I get to take the remaining 20% next year?
The remaining 20% is not lost; it is depreciated over a five-year MACRS schedule. Thus, the total amount of depreciation taken will not be affected by this phase down. Rather, the accelerated depreciation schedule will be slightly less frontloaded than in prior years (when 100% bonus depreciation could be taken).
Hence, the term “bonus depreciation” is somewhat of a misnomer. Bonus depreciation does not enable more depreciation to be taken; it simply allows an asset to be depreciated more quickly for tax purposes. Accordingly, this phase down is not reducing the amount of depreciation that can be taken, but rather slowing down the rate at which depreciation can be taken.
Even so, the 80% bonus depreciation with five-year MACRS schedule available in 2023 still allows for rapid acceleration. See the schedule below for a $1M aircraft, purchased and placed in service in Q3 2023:
|MACRS Depreciation Expense||$40,000||$64,000||$38,400||$23,040||$23,040||$11,520||$200,000|
|Total Depreciation Deduction||$840,000||$64,000||$38,400||$23,040||$23,040||$11,520||$1,000,000|
|Percentage of Purchase Price depreciated||84.00%||6.40%||3.84%||2.30%||2.30%||1.15%||100%|
A Q4 2023 acquisition and placed in service date provides a slightly slower depreciation rate for the 20% of basis being depreciated over the five-year MACRS schedule:
|MACRS Depreciation Expense||$10,000||$76,000||$45,600||$27,400||$21,800||$19,200||$200,000|
|Total Depreciation Deduction||$810,000||$76,000||$45,600||$27,400||$21,800||$19,200||$1,000,000|
|Percentage of Purchase Price depreciated||81.00%||7.60%||4.56%||2.74%||2.18%||1.92%||100%|
The House Ways and Means Committee recently introduced a bill that could extend 100% bonus depreciation through December 31, 2025. The bill contemplates a phasedown to 20% in 2026, with complete phaseout in 2027. However, this bill is in the preliminary phases of the legislative process and should not impact aircraft acquisition decisions prior to enactment.
Several requirements must be met for an aircraft to be eligible for accelerated depreciation (including bonus depreciation); these requirements involve both the ownership structure of the aircraft and use of the aircraft. Entertainment use and personal use of the aircraft also impact the amount of deductible depreciation and must be properly accounted for.