The Evaporating Bonus Depreciation Can Save Your Business Big Bucks in 2022. Do Not Wait— It Phases Out Starting January 1, 2023
The Evaporating Bonus Depreciation: By Steven Wightman, Certified Financial Planner, tm. Short Bio. www.womenwealthwisdom.com
For the first time in more than fifty years, the IRS offers aircraft buyers the most generous tax break for buying a new or used aircraft—if you qualify. Here we will survey the benefits, a few purchasing strategies, and the rules of The Bonus Depreciation.
Bonus benefits
With prices steadily rising these days, aircraft buyers and sellers are shopping for ways to reduce costs and enhance the prospect of sales. Who would ever think that the federal government would offer a helping hand? By amending section 179 of the tax code in 2017, congress increased the first-year depreciation deduction from 50% to 100%! This means buyers can reduce their net purchase cost by multiplying the purchase price by their highest marginal tax rate, or MTR. (See table below). Buyers may also take depreciation deductions over the recovery life of the asset. For small aircraft under part 91, that is generally five to six years. Buyers may also qualify to use a 50-50 hybrid model, half bonus depreciation, and half straight-line depreciation. According to the National Business Aviation Association, “Aircraft that are used in a trade or business or for the production of income, primarily operated domestically, and not used in common or contract carriage may be depreciated over a five year Modified Accelerated Cost Recovery System (MACRS) schedule.”
To see what method(s) are best for you, talk to your tax accountant. Whatever method you choose, bonus depreciation currently saves big bucks on tax returns in year one. Moreover, operating expenses including maintenance, insurance, licensing, fuel, rent, and required training are also deductible for business usage.
Buying strategies
The right purchasing strategies can lower your annual costs. For example, you can spread your purchase out over time to make it much more affordable. Further, the bonus depreciation benefit applies no matter how long your loan period is. Therefore, if you have a six-year loan, you can take your full bonus depreciation this year and even apply it to reduce your loan principal. That is significant savings because loan payments are also low, as depicted in the last column of the table below. For instance, buying my Seawind amphibian instance supplies a bonus depreciation of $66,000 to $129,500 for the highest five Marginal Tax Rates. That is an average first-year savings of $90,000. Those in top MTRs get more than a third of the sticker price back when they file their tax return.
Buy now. Costs will continue to climb as inflation heats and supply chains tighten further. On June 15, the Fed again raised interest rates fearing worsening inflation.
Seller financing
Another attractive way to lower your purchase cost is with seller financing of a percentage of your purchase. When your banker says “no,” your seller may say “yes” and offer you even more favorable terms with alternative financing. For example, Chris sold his experimental airplane for $200,000. The terms were 40% down. The remaining $120,000 was seller-financed at 3% simple interest over six years. This morphed into an affordable monthly payment of $1,230.70, – or only $61 per day to own a high-performance airplane—and that is without taking a bonus depreciation!
The rules are complex yet, unbelievably, a bit simpler than before the passing of the Tax Cuts and Jobs Act (TCJA) in 2017, which became effective in 2018. The rules are as follows:
- Your aircraft must be used at least 50% in a trade or business and/or the production of income.
- It must be placed in service on or before December 31. This means that it is ready to legally fly even if it is sitting in a hangar and not flown since the purchase date.
- As explicitly stated by the IRS, “The taxpayer or its predecessor didn’t use the property at any time before acquiring it.”
- As explicitly stated by the IRS, “The taxpayer didn’t acquire the property from a related
- party.”
For more details visit the IRS website:https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act.
| Purchase price | MTR | Bonus depreciation for 2022 | Purchase price minus bonus | Down payment % | Down payment $ | Loan amount | Gross monthly | Net monthly payments with a bonus amortized for six years |
| $100,000 | 37% | $37,000 | $63,000 | 20% | $20,000 | $80,000 | $1,216 | $957 |
| $100,000 | 35% | $35,000 | $65,000 | 20% | $20,000 | $80,000 | $1,216 | $988 |
| $100,000 | 32% | $32,000 | $68,000 | 20% | $20,000 | $80,000 | $1,216 | $1,033 |
| $100,000 | 24% | $24,000 | $76,000 | 20% | $20,000 | $80,000 | $1,216 | $1,155 |
| $100,000 | 22% | $22,000 | $78,000 | 20% | $20,000 | $80,000 | $1,216 | $1,185 |
| $100,000 | 12% | $12,000 | $88,000 | 20% | $12,000 | $88,000 | $1,216 | $1,337 |
| $100,000 | 10% | $10,000 | $90,000 | 20% | $10,000 | $90,000 | $1,216 | $1,367 |
The Evaporating Bonus Depreciation law phases out by 20% each year until 2027 when it will equal ZERO. This tax break is here today, but shrinking tomorrow, beginning in January 2023. Therefore, the time to buy your dream plane is now. Plan your purchase, talk to your accountant, negotiate to finance, keep good records, and fly your dream home. Oh, and remember to tip your wings to congress for this once in a lifetime lift.
References in my The Evaporating Bonus Depreciation article:
Bonus Depreciation Extended Through 2026 Under the Tax Cuts and Jobs Act | Nolo