Income Tax Conventions Reward Third Quarter Purchasers
Income tax depreciation is statutorily determined for business purchasers of aircraft under a class life system identified as MACRS. The MACRS life for non-commercial aircraft is 5 years, and for commercial aircraft is 7 years. This MACRS system provides that the method of depreciation for aircraft owners is double declining balance with a shift to straight line when it becomes optimal. Simply stated, the method frontloads depreciation to the early years after an acquisition.
In the interest of simplification, the MACRS method of depreciation adopts conventions to reflect the time of year an asset has been purchased. The general rule, the one-half year convention, assumes that an aircraft placed in service between January 1st and September 30th is depreciated as though it was acquired on July 1st. However, if more than 40% of the assets acquired by a taxpayer are purchased in the 4th quarter, then the taxpayer must depreciate each asset acquired during the year under the mid-quarter convention. Under this methodology, an asset acquired from October 1st through December 31st is deemed to be acquired on November 15th. This will result in a significant shift of depreciation from the year of acquisition to the remaining 5-year life of the aircraft. The actual depreciation of non-commercial aircraft operators would be computed under the following table
|Year||September 30th Acquisition||October 1st Acquisition|
The aircraft must be placed in service in order to commence depreciation. In general terms, the law requires that the aircraft be placed in service for its intended use, or at a minimum, be ready and available for that intended use. It is therefore imperative that both closing and actual use occur before the depreciation deadline.
4th Quarter ’15 Acquisitions Preferred Over ’16 Acquisitions
Although an acquisition that occurs in the 4th quarter of ’15 will receive significantly less depreciation than one occurring in the 3rd quarter, both acquisitions are preferred over ones occurring in ’16. As noted from the table above, an acquisition in the 4th quarter of ’15 will result in 5% depreciation in ’15 and 38% depreciation in ’16. An acquisition postponed into ’16 will receive 20% depreciation in ’16, or less than ½ of the depreciation allowable in ’15 and ’16 by a 4th quarter purchaser.
The availability of MACRS to your aircraft purchase is contingent upon meeting specific structuring, basis, and use requirements, so please speak with your tax advisor knowledgeable in aircraft issues before relying upon the numbers included herein. Additionally, a year-end review of the aircraft flight logs is required to confirm eligibility for accelerated depreciation. On the verge of closing an aircraft purchase? Further delay could be costly.
September 15, 2015
Suzanne Meiners-Levy Louis M. Meiners, Jr., CPA
Partner, Legal Advisor Aviation Tax Consultant
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