After years of debate, tax reform has arrived. The late-year 2017 passage and signing of the Tax Cuts and Jobs Act (TCJA) has reshaped the business and individual tax landscape. The TCJA provides excellent tax opportunities for businesses of all sizes to invest in general aviation aircraft, but requires careful planning and review to ensure that deductions are preserved. Below you will find a few highlights of the new law, along with discussion points to consider with a trusted advisor.
Full Equipment Expensing for Eligible Aircraft and Equipment Purchases- New and Pre-Owned
Perhaps most notably, the TCJA revised the bonus depreciation provisions pursuant to Section 26 U.S.C §168(k) of the Internal Revenue Code to allow for 100% bonus depreciation for qualifying new and pre-owned aircraft purchased and placed in service after September 27, 2017, gradually phasing down beginning in 2023. This is a historic shift of an incentive that has usually only applied to factory new purchases. Additionally, Section 179 expensing elections have increased substantially, allowing additional first-year write offs for equipment and component parts placed in service. This makes 2018 an attractive time to add to your fleet or change aircraft, or alternatively to replace or upgrade major components of your business aircraft. In order to use bonus depreciation, the equipment must be used at least 25% of the time for qualified business use (a term of art that must be closely evaluated by each taxpayer) and at least 51% of the time for total business use.
Elimination of 1031 Exchanges for Equipment
The TCJA has eliminated the 1031 exchange for tangible personal property, a tool commonly used by owners replacing their business aircraft to avoid the impact of depreciation recapture when an aircraft is being sold only to be replaced by another business aircraft. For exchanges already in process before year-end 2017, TCJA allows the completion of the exchange provided the relinquished aircraft was sold (or, in the case of a reverse exchange, the replacement aircraft was acquired) before year-end. While the elimination of 1031 exchanges is a disappointment for the industry, the expansion of deductions available under the revised 168(k) and Section 179 will significantly soften the blow for most business aircraft operators replacing their business aircraft within the tax year.
Clarification of No Excise Tax for Part 91 Flights Pursuant to a Management Agreement
Thankfully, the TCJA puts to bed a topic of ongoing controversy with respect to aircraft managed by Part 91 management companies. Prior to 2012, the longstanding rule had been that an aircraft owner/lessee making payments to a Part 91 management company for the care and operation of the aircraft was not creating a commercial-transportation arrangement and, therefore, did not trigger the air-transportation excise tax (FET). In 2012, the IRS upended this understanding with a contrary interpretation, which posed an existential threat to the Part 91 management industry. Numerous audits ensued, many of which have now been held in stasis for years as the IRS re-evaluates it policy. The TCJA makes clear that, at least going forward, these Part 91 management fees will not be subject to FET. Further, it is expected that the IRS is now unlikely to assess tax on these arrangements for earlier periods.
Adjustments to Deductibility of Flights Pursuant to Section 274
Along with the new tax incentives and clarifications came the loss of several deductions commonly taken in our industry. Travel connected to business entertainment is no longer deductible starting in 2018. These trips arguably fall under the same disallowance formula and methodology provided by 26 C.F.R. 274-10, the regulation that addresses entertainment use of aircraft. 274-10 provides that all expenses associated with the aircraft, including tax depreciation and other fixed costs, must be disallowed per passenger seat in the event of entertainment use. Accordingly, the economic impact of this adjustment will be significant for taxpayers that use the business aircraft for business entertainment trips.
Additionally, the TCJA adds a new subsection to Section 274 (26 U.S.C. § 274 (l)), that provides that commuting flights provided to employees on company aircraft are no longer deductible trips at the company level. While commuting has never been considered a business expense, many commuting trips have previously remained deductible at the company level if they were provided as compensation to the employee. The continued availability of this fringe deduction at the company level appears significantly restricted under the new law when a business aircraft is being used for travel between home and work. If your company aircraft is used for commuting trips, speaking with a tax lawyer about their on-going deductibility is prudent as you plan usage moving forward.
Tax Rate Changes for C-Corporations and Deductions for Pass Through Entities
Finally, the provisions that may most significantly impact the structuring of business aircraft acquisitions and operations are not industry specific; they impact all business practices for US taxpayers. Corporate tax rates have been substantially reduced to 21%, and for some pass-through businesses, there is a newly available deduction for up to 20% of the income generated. The pass-through income reduction, which has the potential to provide substantial tax relief on aircraft recapture income and other business revenues, is very complex and requires a close analysis of the company type, income level, wages paid, and the assets held by the entity. Standard industry practice must adjust to the new reality that business entities will be subject to different rates and that owners and operators may need to adjust expense allocations to ensure that the tax liability is minimized where appropriate and properly determined. Changes to the treatment of carryforward losses and interest deductions may also impact business planning.
The Time is Now
Tax reform is exciting, and the impact of the TCJA should be to strengthen investment in aircraft and aviation equipment. There is reason to believe that uncertainty regarding reform has left many potential aircraft buyers on the sidelines waiting for clarity in years prior. With strong pre-owned inventory and many new aircraft models available for business investment and use, 2018 is forecasted to be a robust year for the industry. Whether you are considering a purchase or you are already operating a business aircraft but want to ensure that your deductions are preserved, it is critical to work with an aviation tax lawyer to help you navigate the many opportunities that await. The time is now.
February 5, 2018
Suzanne Meiners-Levy, Esq.
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.
Tax Disclosure. Any 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 tax laws, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.