The Slow Demise of Bonus Depreciation

The business aviation world has grown accustomed to the bonus depreciation provided by the 2017 Tax Cuts and Jobs Act (TCJA). This is the sixth year in a row in which buyers of corporate and private jets have been able to write off 100 percent of the purchase price in the year the aircraft is acquired and placed in service. Yet lurking in the background since the TCJA’s enactment has been the knowledge that beginning in 2023, the tax gift of bonus depreciation would begin to gradually fade away. Accordingly, worries about bonus depreciation being eliminated following the 2020 election have been replaced by fears that Congress will not move to keep this tax break alive.

Bonus depreciation is supposed to be good for business by encouraging the purchase of assets. When it was originally enacted after the 9/11 tragedy, the focus was on stimulating the manufacture of new assets, including business jets, by offering a generous tax write-off for buying them. As a result, the tax bonus was available to airplane purchasers only if they acquired factory-new aircraft. The TCJA, however, provided the same tax write-off for preowned aircraft. Given this new applicability to used aircraft, the incentive to fly privately provided by COVID-19, and that many airframe manufacturers are located outside the U.S., it has become hard to discern whether bonus depreciation really does provide any economic benefit for the U.S., at least where business jets are concerned. 

If economic benefit was truly the objective, then one would think that 100 percent bonus depreciation should either be permanent or at least available only during times of economic malaise. But 2017 was hardly such a time, and as noted earlier, bonus depreciation is about to die a slow death, as the table below shows. 

TCJA Phase-down Schedule for Bonus Depreciation Rates

So, unless Congress resurrects bonus depreciation, it will be merely a fond memory in 2028. Practically speaking, it will be gone before then for business jets; I don’t imagine many people will acquire jets in 2027 just to obtain a 20 percent bonus write-off, though anyone who does buy an aircraft then will want to take advantage of it.

Assuming bonus depreciation does provide economic stimulus, it’s easy to argue with the wisdom of making it temporary in 2017, but there is also a certain logic to its planned death, at least regarding business jet purchasers. These buyers have shown a decided interest in taking advantage of the bonus before it’s phased out. In other words, its scheduled disappearance offers a significant incentive to buy a jet sooner rather than later. If Congress extends the bonus, it will keep the party going, but the current jet market hardly needs a stimulus.

For many jet buyers, however, 100 percent bonus depreciation is not disappearing as fast as they might think. As the chart shows, it remains available in 2023 for “LPPP” (Longer Production Period Property) and “Certain Aircraft.”

Non-refundable Deposits 

To qualify as “Certain Aircraft,” the buyer must put down a non-refundable deposit of the lesser of 10 percent of the purchase price or $100,000. It has often been assumed that this deposit must be stipulated in a written binding contract in, for example, 2022 to obtain the 2022 bonus depreciation percentage (100 percent) for an aircraft delivered the following year. This makes perfect sense on the theory that buyers should be eligible for the 2022 bonus depreciation rate in 2023 if they committed in 2022 to purchase an aircraft in a binding agreement with a non-refundable deposit. 

On the other hand, what is the point of such a commitment if it occurs in 2023 when the aircraft is acquired and placed in service in 2023 anyway? However, except for aircraft placed in service in 2027, the regulations only require the non-refundable deposit “at the time of the contract,” which need not be in the prior year and presumably could be signed on the day you take delivery. In other words, it appears that Congress made a mistake and failed to provide an important requirement that was likely intended.

Nevertheless, the $100,000 non-refundable deposit is a real requirement. Most business jet purchase agreements have a deposit in excess of that amount, so the main issue in qualifying for “Certain Aircraft” is making sure that at least $100,000 of it is “non-refundable.” A deposit would not be non-refundable, for example, if the contract allowed the buyer to reject the aircraft in its sole discretion following a demonstration flight. On the other hand, a default by the seller that allowed the buyer to recoup its deposit would presumably not make it non-refundable, though some buyers, to be sure of qualifying for 100 percent bonus depreciation in 2023, have made at least $100,000 of their deposit non-refundable no matter what.

There are a few other “Certain Aircraft” requirements that will not present obstacles for most jet buyers, such as that the airplane must cost more than $200,000 and have a production period longer than four months. The main issue with “Certain Aircraft” is that it does not include aircraft that represent “transportation property”—that is, aircraft used in the trade or business of transporting persons or property (basically, charter). Transportation property, however, is included in LPPP aircraft, although the basis for bonus depreciation in 2023 is limited to the amount paid to, or percentage of work performed by, the manufacturer before Jan. 1, 2023. LPPP aircraft must also have a production period of more than a year (a requirement that many business jets will not meet) and a cost exceeding $1 million.

If you don’t qualify for either of these transition rules, your bonus depreciation for an aircraft placed in service in 2023 will be limited to 80 percent, but your total depreciation that year can nevertheless be higher. Suppose, for example, you contract to acquire a business jet for $20 million and fail to satisfy the LPPP or Certain Aircraft requirements. The aircraft is placed in service in 2023 and all your flights in that year constitute qualified business use. You will then be entitled to deduct bonus depreciation for 2023 of 80 percent ($16 million). In addition, under the six-year Modified Accelerated Cost Recovery System (MACRS) schedule, you can also deduct 20 percent of the $4 million balance, or $800,000, in 2023, with the remainder spread over the next five years. 

As bonus depreciation decreases, the MACRS portion will increase—unless Congress elects to extend 100 percent bonus depreciation. Buyers intending to take advantage of “Certain Aircraft” or LPPP opportunities for 2023 should consult their aviation counsel to make sure they comply with the requirements.