As we approach the last quarter of 2019, market indicators support the possibility of a very strong year-end in aircraft transactions. If you have not purchased or sold an aircraft since the passage of the Tax Cuts and Jobs Act (TCJA) of late 2017, a review of how changes in the tax law may impact transactions for the balance of the year is in order. Similarly, if you are contemplating selling your aircraft, upgrading, bringing in a partner, or acquiring a new aircraft, knowledge of the tax law and its impact on your business can help you make an informed decision about the economic impact of the business decision on your bottom line. In this article I explore five opportunities and concerns related to the tax reform that are certain to impact the quarter ahead:
1. Pre-owned Aircraft Inventory for Equipped Aircraft is Low
The TCJA altered the tax environment of aircraft purchases by making 100% bonus depreciation available not only for new, but also for pre-owned aircraft. As anticipated, this significant purchase incentive increased demand for ADSB compliant pre-owned aircraft in desirable makes and models. Buyers that had previously delayed purchases moved back into the market, leaving inventory in many makes and models at an all time low. If you are a potential seller, this may make the 4th quarter an excellent time to sell your aircraft. Given the current backlog of aircraft rushing to secure 2020 ADSB compliance, it might be wise to move forward with listing any aircraft for sale as early as possible to allow sufficient time for pre-buy inspections before year-end.
2. The Lack of 1031 Exchanges for Tangible Personal Property Changes Transaction Dynamics
The TCJA eliminated the use of 1031 exchanges for tangible personal property beyond a limited window of now-completed transactions. The 1031 exchange provisions were commonly used to avoid depreciation recapture for business aircraft owners planning to upgrade their aircraft while disposing of an aircraft. Without 1031 exchanges, timing of selling and replacing an aircraft has become even more critical, given that taxpayers can no longer span across tax years without creating a recapture event. This truth makes aircraft owners more concerned about timing the disposition and acquisition within the same tax year. Understanding both your own business needs as it relates to recapture, as well as the motivations of your potential seller or buyer is essential in maximizing the value of the deal. Some aircraft owners are very sensitive to the recapture timing while others are not. This sensitivity depends on a number of factors, including, but not limited to: 1. The desire and ability of the buyer to take bonus depreciation and/or Section 179 expensing on the new purchase, 2. Possible limitations on deductibility created by the excess business loss rule limitations in the TCJA, and 3. economic realities of their primary operating business, including any unusual income events in the years at issue.
3. 4th Quarter Deliveries May Still Qualify for Bonus Depreciation and Section 179
I speak with hundreds of aircraft owners each year alongside their economic advisors and CPAs and find that many tax advisors are made nervous by the “risk” of taking bonus depreciation or significant 179 expensing elections for transactions completed in the last few months or weeks of the year. I believe this approach is misplaced. It is worth noting that under the TCJA, bonus depreciation is the default position, requiring taxpayers to opt out of bonus by written election.
Short-year use profiles provide an excellent opportunity to ensure that the aircraft stays fully dedicated to its business mission in the year of significant depreciation deductions. Taxpayers should be guided by knowledgeable professionals on how to keep the highly specific flight logs required for compliance with the personal use regulations governing aircraft, Section 274-10, and get a clear understanding of the impact of various flight and passenger profiles.
Additionally, short year or end-of the year transactions also provide business owners to make a large equipment investment during a moment of peak knowledge about the tax year in which they seek to take the deduction. This reduces the uncertainty about any loss limitations or income events that may greatly impact the value of the deduction. Finally, if an aircraft owner has disposed of an aircraft during the tax year at issue, bonus depreciation can usually be used to offset any recapture that the taxpayer may incur as a result of that disposition.
It is important to remember that in order to take depreciation or 179 expensing, the aircraft (or avionics suite or other depreciable asset) must be acquired and placed in service for “qualified” business use before year end in order to qualify. Talking to an aviation tax advisor about the meaning of “qualified” business use, as well as proper structuring of the transaction to avoid any inadvertent tax traps is essential in determining the allowability of the deduction.
4. Excess Business Loss Limitations and Pass-Through Income Deductions are Still Just Beginning to Shape Business Behavior
As I have detailed in past articles, the Tax Cuts and Jobs Act impacts extend well beyond the general aviation context, leading to a wide variety of corporate restructuring and other business planning. The rules are very complex and regulatory clarification has been slow to arrive and murky to navigate. Accordingly, many business owners are only now receiving their first understanding of the effect of the tax reform as they finalize their 2018 returns, a process which will continue for some taxpayers through October 15, 2019. I believe that this deeper understanding is likely to drive tax friendly transactions before year end.
5. Political Uncertainty May Push Transactions Earlier
Finally, lack of certainty about U.S. political priorities has traditionally had a significant impact on the strength of both U.S. and foreign markets. With an election year ahead, many business owners are concerned that a change in the Administration may lead to new tax or environmental policy that would disfavor the general aviation community. While the TCJA retains 100% bonus depreciation through the tax year 2022, with a 20% phase out per year thereafter, new leadership in Washington could lead to a new law with potentially less favorable tax treatment.
While I am certainly not capable of predicting the future of tax or other policy decisions, I do understand the value of certainty in business planning. Many business owners with known aviation needs are likely to take advantage of the certainty of 2019 tax policy to move forward with transactions that make good business sense. 2019 is, for many business owners, a great time to acquire new business tools to maximize the profitability of their business operations efficiently. General aviation aircraft can be an essential piece of many types of businesses, but understanding the rules governing general aviation acquisitions and operations is essential in maximizing the utility and value of your aircraft. This article has highlighted just a few of the concepts that will govern my thinking in the months ahead. There is no time like now to begin planning for how you will make the fourth quarter work best for you. Happy flying!
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.