Buy an Airplane in 2022 Without Paying

Buy an Airplane in 2022 and Let OPM and IRS, Not You, Pay For it. By Steve Wightman, CFP (R)

Buy an Airplane in 2022: At Airventure 2022 this year I listened to an hour-long lawyer-led forum about buying and selling an aircraft. The general attendee’s response was “I can’t afford it.” No longer! For business owners and tradesmen only, IRS is offering buyers a once-in-a-lifetime 100% Bonus Depreciation (BD). This means you can deduct from your income tax whatever you pay for the aircraft if you put it in service for your trade or business on or before December 31. This by itself is a giant incentive to buy now before this benefit begins to melt on January 1, 2023. See links.

You can take an additional quantum leap by combining the BD with a HELOC of equity home. Here is an example of paying nothing in out-of-pocket (OOP) year one. Your bank (Other People’s Money) grants you a loan sufficient to cover the entire purchase price of your airplane with a one-year deferred payment loan. After flying your new plane for twelve months you begin regular payments with a 5-year remaining loan term to pay down your balance. Remember that equity loan products and terms vary widely. Example: Your bank loan may require you to pay monthly interest-only. Running your own numbers, you will soon see that even this is a relatively tiny price to pay to make your dream a reality this year. https://mail.google.com/mail/u/0/#inbox/FMfcgzGqPpcnFVrKBGrscqflJslpLXGf

Simple Loan Calculator After Applying a 35% Year 1 BD For a Taxpayer With a 35% Marginal Tax Rate, MTR.
Purchase price Bonus Depreciation			100,000 35,000
Down payment	$        65,000.00
Annual interest rate	4.10%
Loan period in years	5
Start date of loan	12/1/2022
Monthly payment	$         1,200.01
Number of payments	60
Total interest	$         7,000.57
Total cost of loan	$        72,000.57

In the above example, you use your deferred payment loan to pay for the airplane with no OOP cost to you. You negotiate a Purchase and Sales Agreement that calls for $65,000 down and a final balloon payment of $35,000 on or before 1 May 2023. Since you borrowed $100,000 you will have extra cash to either apply to the purchase or apply back to the loan. During winter 2023 you file your tax returns, and you get your tax refund(s) and immediately allocate $35,000 to pay your seller and finalize the deal or pay down the loan. Your choice. Note. The BD is triggered on the date you take possession of the airplane, IAW the Purchase agreement. You continue to enjoy your airplane for a year with no monthly payments AND you engineered the IRS to pay for over one third of it. Brilliant! It gets better for some. If your state income tax follows federal forms, you might get some additional tax deduction from your state income tax. For those who are in a different Marginal For a different tax rate than above just multiply your purchase price by your MTR to arrive at your BD. Rules, rules, rules. Remember to talk to your tax advisor to be sure this strategy is right for you.

Summary. First, the Bonus Depreciation by itself makes 2022 a perfect year to purchase an airplane to put into service for a trade or business. Based on my studies of the Tax Code, I doubt if you will see this tax break again. Catch? Among other things, you must put the plane in service before January 1^st  to get the 2022 Bonus Depreciation.

Second. Loan products vary wildly with region, rates, and terms. The best loan products are available to those with the best credit ratings. This means you will need to shop around to find what works best for you. Check AOPA and EAA loans too.

Third. If you have a less than sterling credit score, OR insufficient equity in your home, investigate borrowing from your retirement plan. Employers have their own rules about retirement plan loans. Investigate. Participants with loan provisions in 401k plans and alike may borrow up to $50,000 or 50% of their retirement savings – whichever is lower. They pay interest back to themselves instead of a bank at market rates. Moreover, there is no mandatory payment schedule. This tactic is attractive in today’s low-interest rate savings environment. 401k loans must be fully repaid within 60 months on terms set by employers. Married couples can each borrow a maximum of 50K from their own 401k plans. Catch? Full payment is due when you terminate employment.

Fourth. Partial or full seller financing is worth exploring especially if other options are limited to you. If both buyer and seller are motivated, you may land a deal and a 2022 Bonus Depreciation too.

Best idea. Why not cherry pick and combine one or more of these options to land the combination that works best for you? Make Bonus Depreciation and OPM your buddies and blue skies are yours!

Bonus Depreciation: 20220724 Bonus Benefits of Buying An Airplane in 2022.docx

Loan types and rules summary: //www.discover.com/home-loans/articles/how-home-equity-loans-work-rates-terms-repayment/  

Bonus Depreciation Summary. https://www.gkglaw.com/news_events/815-special-bonus-depreciation-rules-aircraft-purchasers-in#:~:text=This%20year%2C%202022%2C%20may%20be,the%20end%20of%20this%20year.

401k plan quick rules: https://www.employeefiduciary.com/knowledge-center/401k-loan-rules

Note. This article is for educational purposes only. No attempt has been made to give advice in any form. Loans and taxation are very complex topics. Be sure to consult with a licensed financial adviser before you sign ANY agreement. They can help you avoid costly mistakes and guide you to the best choices.

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