We have compiled the top ten questions and comments frequently asked or posed to our staff in 2023. We hope these answers will provide readers with some timely and relevant information for their aircraft acquisition planning. Despite the uncertainties of the economy, interest rate and threat of a recession, we continue to see a very active market for aircraft transactions, and many buyers will take advantage of a late-year acquisition to capture immediate income tax benefits.
1. Bonus depreciation for 2023 is 80 percent. What happens to the remaining 20 percent?
For Part 91 operators, the remaining 20 percent of tax basis will be depreciated over the 6-year life utilizing MACRS depreciation method. Taxpayers who executed a purchase agreement of a new aircraft prior to 2022 can still take advantage of 100 percent bonus depreciation in 2023 when certain requirements are met.
2. Does Section 179 Expensing still apply?
For aircraft costing less than $3 million, this provision still applies and may help taxpayers achieve 100 percent expensing in 2023. There are additional requirements to qualify for Section 179 Expensing, but many taxpayers can utilize this provision if their business is profitable. For example, a $1 million aircraft can be fully expensed under Section 179 Expensing in 2023.
3. I sold my aircraft in 2023 for a profit.How is the transaction taxed?
Recapture of tax depreciation is taxed as ordinary income. If the plane is sold for more than the original purchase price, the gain realized over the original purchase price is taxed as capital gains. The holding period of the aircraft will determine if the gains will be taxed as long- or short-term capital gains.
4. Passive Activity Loss – why is it relevant?
Section 469 of the tax code differentiates income between active and passive. Passive loss can only be used to offset passive income. This is relevant to aircraft owners because if the aircraft deductions and depreciation are considered passive, these losses cannot be used to offset the active business income of a taxpayer. Most aircraft owners have significant active business income and very few taxpayers have significant passive income. Therefore, it is critical that the ownership structure and the usage of the aircraft do not produce passive deductions for the taxpayer.
5. Can I deduct my vacation flights if I pay my aircraft company a fair market value lease payment?
No. Simply “paying” for your vacation flights by moving money from you individually to your aircraft company (that you also own) does not convert a non-deductible vacation trip into a tax-deductible trip.
6. I bought a plane in 2023. Do I have to maintain 100 percent business use in 2023?
No. Some personal use of your aircraft will result in a pro rata disallowance of operating expenses. However, the impact on depreciation deduction for 2023 is mitigated by making a taxpayer-friendly tax election with your 2023 tax return.
7. I bought a plane in 2023 and it is leased to a Part 135 charter company, and I will take advantage of bonus depreciation in 2023.
See number four above. This is a common scenario where an aircraft may generate passive deductions that a taxpayer may not be able to utilize.
8. I will close my acquisition in South Carolina, pay $500 sales tax as proof that sales tax has been paid and I can bring the plane home tax free.
The distinction between sales tax and use tax is often misunderstood. Sales tax is easily avoided by closing a transaction in a sales tax friendly state, a state with a fly-away exemption for non-residents, or a state that does not impose sales tax. However, a use tax will apply when the aircraft returns to its home state.
For example, an aircraft is purchased in Bozeman, Montana. Since Montana does not impose a state sales tax, no sales tax is due at closing. When the aircraft returns home to California, for example, California use tax will be due since the aircraft is based in the state, unless an exemption is met. Use tax planning is often neglected by aircraft owners.
9. My new aircraft delivery is delayed until 2024. Can I prepay for the aircraft and depreciate the aircraft in 2023?
No. The tax code requires that the aircraft be placed in service for the aircraft to be depreciated. Placed in service means that the aircraft must be legally owned and available for use to the taxpayer. An unfinished aircraft at the end of 2023 is not considered placed in service and therefore no tax deductions can be taken until the aircraft is delivered in 2024.
10. I sold my business in 2023. Can I purchase an aircraft and reduce my income tax liability?
Maybe. The deductibility of a business aircraft depends on the business justification of the taxpayer. If a taxpayer sold a business and retires, it will be impossible to justify the need for a business aircraft. If the taxpayer becomes an employee of the business under new ownership, the tax code is not friendly to employee utilizing a business aircraft and income tax deductions can be very limited. If you are negotiating the sale of your business, some advanced planning on how the business is sold can help create continuing deductions for the use of a business aircraft.
Aviation Tax Consultants, LLC (www.aviationtaxconsultants.com) is celebrating its twentieth anniversary in 2023. Their consulting services include the elimination or reduction of sales and use tax, maximizing income tax savings, controlling the cost of personal use of the aircraft, complying with passive activity loss rules and Federal Aviation Regulations. Cooperation with client’s current tax and legal advisors is welcome and encouraged.
