Closing before September 30 to maximize tax depreciation in 2024

With 100% or 80% bonus depreciation in effect since 2017, mid-quarter convention has not been a relevant topic for tax planning discussions.  With bonus depreciation for 2024 acquisition at 60%, it’s a good time to revisit this tax provision that can result in a loss of income tax deductions in 2024.

Modified Accelerated Cost Recovery System (MACRS) is the depreciation method for business assets.  To prevent taxpayers from waiting until the very end of a tax year and purchasing lots of depreciable equipment to generate lots of tax depreciation, mid-quarter convention rules limit the amount of late year equipment purchase to 5% of acquisition price, instead of 20% for equipment with a 5-year depreciable life.  Late year is defined as after September 30 for a calendar year taxpayer.

For example, a $10M business aircraft purchased and placed in service on September 30, will result in $6.8M of tax depreciation for 2024, assuming 100% business use.  The same aircraft purchased and placed in service on October 1, will result in $6.2M of tax depreciation, a reduction of $600,000.  Assuming individual income tax rate at 40%, a taxpayer closing an acquisition on or after October 1 will result in an increase of income tax payment by $240.000 for 2024.  See illustration below.

While depreciation is a timing benefit, meaning that the $600,000 in reduced tax depreciation in 2024 will be recouped over the next five tax years, most taxpayers would prefer to have access to the cash flow from the reduced income tax payment.  If you are in the market for a business aircraft, to the extent possible, you would want to speed up the process to maximize the tax deductions available in 2024.