2018 Federal Tax Changes Related to Business Aviation — Originally published in BusinessAir Magazine, January 2018, Volume 28, No. 1.
The Tax Cuts and Jobs Act of 2017 (“TCJA”) contains several significant changes that impact business aviation. Some of the changes are merely clarifications that the aviation industry has sought for years, while the other changes have many people speculating that the modifications will stimulate the sales of both new and pre-owned aircraft for the next several years.
First, a new subsection to the internal revenue code has been added which clarifies that owner flights on aircraft managed by management companies are not subject to Federal Excise Tax (FET), but are subject to the non-commercial fuel tax. This has been a controversial issue since before I started in aviation twenty years ago, and it is a welcome change. For years, attorneys in the industry have been forced to consider this unsettled issue when drafting contracts and advising aircraft owners as to possible liabilities when placing an aircraft with a management company (including a fractional program) or when advising aircraft management companies on collecting and remitting FET on managed aircraft. In order to avoid FET on fees paid to management companies for their services, the payments need to be made by the owner or lessee and cover aircraft management services. No longer is there a question as to whether the management service fees are subject to FET. All aircraft management services contracts should be reviewed and revised, if necessary, in light of this new subsection.
Next, for those in the market for an aircraft, bonus depreciation has been significantly expanded. First, the bonus has increased from 50% to 100%. The TCJA allows the taxpayer to immediately write off the entire cost of the aircraft acquired and placed into service after September 27, 2017 and before January 1, 2023. For tax years after 2022, there is a gradual phase out of bonus depreciation by 20% each year for five years. The second important change with bonus depreciation is that, under the TCJA, it applies to both new and pre-owned aircraft as long as the aircraft is used for business purposes for more than half of the time. Therefore, it is important to note that for the next five years, aircraft that are used more than half the time for business purposes qualify for 100% deductions in the cost of ownership for both new and preowned aircraft. Many have speculated that this change will dramatically stimulate both new and particularly pre-owned aircraft sales starting in 2018 and onward for the next five years.
The changes to bonus depreciation are welcome since one of the negative impacts of the TCJA on business aviation is the loss of like-kind exchanges. Under the TCJA, taxpayers will no longer be allowed to defer taxable gain on the sale of aircraft through the use of a like-kind exchange. Starting in 2018, the taxable gain on the sale will be subject to immediate recapture for tax purposes. However, if an aircraft, new or pre-owned, is purchased in the same year as the sale, and the taxpayer is able to take advantage of bonus depreciation, then the taxpayer may be able to reduce or eliminate the overall tax impact of the aircraft sale. The elimination of like-kind exchanges became effective on January 1, 2018 and is a permanent repeal.
Based on the changes made by the TCJA, aircraft owners may be able to take advantage of 100% depreciation starting in 2018. If the aircraft owner can’t use bonus depreciation when purchasing the new aircraft, consideration should be given to leasing an aircraft so the financing institution can take advantage of the depreciation and pass along lower lease rates to the aircraft lessee. Furthermore, when the aircraft owner or lessee hires a management company to manage its aircraft, they can have peace of mind that FET is no longer an unknown liability when paying management service fees.