It’s a Yes for Bonus Depreciation,
Enhanced Expensing
By Louis M. Meiners
ENHANCED EXPENSING
The Small Business Jobs Act retroactively expands the expensing election under Section 179 for all of 2010 and 2011. Prior law provided for a maximum expensing election of capital expenditures of $250,000 for qualified small businesses. Qualified small businesses were defined as those that invest less than $1,050,000 in capital items during the year. Under the new law the expensing doubles from $250,000 to $500,000. In addition, qualifying small businesses includes all businesses that invest less than $2,500,000 during the year.
The present law limitations on the availability of the Section 179 deduction remain. These most notably include a limitation on use of the deduction to taxable income, a requirement that the property be used primarily for qualified business, and certain restrictions on related party leasing.
BONUS DEPRECIATION
The Act extends 50-percent bonus depreciation for new equipment purchases to 2010. The extension is retroactive, and will therefore apply to all qualifying 2010 purchases. Bonus depreciation applies to new parts, components, avionics and the like, and new aircraft without regard to cost.
Aircraft delivered in 2011 may also qualify if they meet certain production-period requirements and were contracted for after 2007 but before 2011. For non-commercial aircraft, the law requires a minimum of a 10-percent or $100,000 deposit (whichever is lesser), as well as an estimated production period exceeding four months, and a cost in excess of $200,000.
STRUCTURE OF COMMANDER PURCHASE MAY IMPACT DEDUCTIONS
The purchase of a newly renovated aircraft will be treated as used, but the separate purchase of new components for a used aircraft will qualify for bonus depreciation to the extent of the cost of the new parts. The portion of the cost attributable to used assets will qualify for enhanced expensing; while the cost of the new will qualify for expensing, or bonus, and may be bifurcated to qualify for both.
For example, assume an owner acquires an airframe for $300,000 and has it renovated with $100,000 in new avionics, and $600,000 in new engines. If he acquires the renovated aircraft after the fact, he will qualify for a maximum of $500,000 in expensing plus regular depreciation. If he instead completes the renovation himself, he will qualify for a maximum of $500,000 in expensing, $250,000 in bonus depreciation, plus regular depreciation.
MACRS DEPRECIATION FOLLOWS EXPENSING AND BONUS
The ordering rules under the new law remain the same as existing law. Expensing is computed initially, followed by bonus depreciation, and then depreciation under the MACRS rules. Non-commercial aircraft are generally depreciated over a five-year life, while commercial operators recover depreciation over a seven-year life; in either case double declining balance depreciation is used.
MID-YEAR VS. MID-QUARTER DEPRECIATION
When a taxpayer acquires more than 40 percent of his assets in the 4th quarter of the year, he is required to compute depreciation under the mid-quarter convention. As previously stated, the depreciable life is generally five years for non-commercial aircraft operators and the double declining balance method is used. Non-commercial aircraft acquisitions subject to the mid-quarter convention will qualify for 5 percent first-year additional depreciation, after applying the applicable expensing election and bonus depreciation. A table illustrating the annual deductions under each method is included in the footnote below.
It is imperative to recognize that in order to qualify for depreciation of any type in 2010, the asset must be placed in service during that year, and must be used for business. It would therefore be preferable to conduct actual business activity to provide evidence of meeting the placed-in-service requirement. For calculations of depreciation on both new and used aircraft under this new provision, please visit www.advocatetax.com.
Lou Meiners is an aviation tax consultant for Advocate Consulting Legal Group, PLLC, a law firm whose practice is limited to serving the needs of aircraft owners and operators relating to issues of income tax, sales tax, federal aviation regulations, and other related organizational and operational issues. IRS Circular 230 Disclosure: New IRS rules impose requirements concerning any written federal tax advice from attorneys. To ensure compliance with those rules, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under federal tax laws, specifically including the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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