Aviation Tax and Aircraft Sales Tax

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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
1 20.00% 5.00%
2 32.00% 38.00%
3 19.20% 22.80%
4 11.52% 13.70%
5 11.52% 10.90%
6 5.76% 9.60%

 

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


Advocate Consulting Legal Group, PLLC is 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.

 

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.

This memorandum was designed to provide information of general interest to the public and is not intended to offer specific legal advice. The offering of this information does not create an attorney-client relationship. You should consult Advocate Consulting Legal Group, PLLC, or your tax advisor, if you have a matter requiring attention. For further important tax information regarding aircraft ownership and operation, please visit our website, www.advocatetax.com.


Advocate Consulting Legal Group, PLLC. 3530 Kraft Rd. Suite 203 Naples, FL 34105 and 1300 N. Westshore Blvd. Suite 220 Tampa, FL 33607. Suzanne Meiners-Levy, Esq. (239) 213-0066. Tax Disclosure. 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.Privacy Policy. Terms of Use. RSS Feed