Earlier this week, the U.S. House of Representatives joined the Senate in passing the American Taxpayer Relief Act of 2012 (“Taxpayer Relief Act”). The legislation was intended to avert the “Fiscal Cliff” and was signed into law Wednesday by President Obama.
The Taxpayer Relief Act includes a number of provisions that modify existing U.S. tax law, but potential aircraft buyers will be particularly interested in the amended Section 168(k)(2) of the Internal Revenue Code (“IRC”), which extends 50% bonus depreciation for aircraft purchased and delivered through the end of 2013 and, in certain circumstances, the aircraft can be placed into service in 2014 and still qualify.
Aircraft buyers who purchase new business aircraft before January 1, 2014 will be eligible to qualify for 50% bonus depreciation if their aircraft meets the definition of “qualified property.” “Qualified property” includes property which: (1) has a recovery period of 20 years or less; (2) the original use commences with the taxpayer after December 31, 2007; (3) is acquired by the taxpayer after December 31, 2007, and before January 1, 2014, but only if no written binding contract for the acquisition was in effect before January 1, 2008; (4) is acquired by the taxpayer pursuant to a written binding contract which was entered into after December 31, 2007, and before January 1, 2014; and (5) is placed in service by the taxpayer before January 1, 2014. There is an extended “placed in service” date through the end of 2014 for “certain aircraft” and “transportation property.”
In order to qualify as “certain aircraft,” the aircraft should cost more than $200,000, have a production period in excess of four months and the purchaser is required to make a nonrefundable deposit of the lesser of 10% of the cost of the aircraft or $100,000. “Certain aircraft” includes virtually all business jets and corporate aircraft. However, it does not include “transportation property” which is customarily referred to aircraft used predominantly in charter operations. If the aircraft being purchased meets the criteria for “certain aircraft,” the aircraft can be delivered before December 31,2014 and still qualify for 50% bonus depreciation. Please note that “transportation property” is also afforded this extended “placed in service” date.
“Bonus depreciation” allows a taxpayer to depreciate an asset on a faster schedule than would otherwise be permitted by law. Bonus depreciation is offered in addition to standard first-year depreciation and is taken in the first year that the depreciable asset is placed in service. It is important to remember that bonus depreciation applies only to new equipment; used aircraft do not qualify. Bonus depreciation is not limited to aircraft and applies to a range of capital assets. However, to be considered “qualified property,” the asset obtained must be new property and the taxpayer must be the first owner of record. Due to legislative changes, 100% bonus depreciation is no longer available and 50% is now the highest rate of bonus depreciation currently available under law.
Other important provisions of the Taxpayer Relief Act worth noting include:
An increase in income tax rates from 35% to 39.6% on single taxpayers with incomes above $400,000 and married couples filing jointly above $450,000
Tax rates on qualified dividend income and long-term capital gains rise from 15% to 20% for taxpayers with the same $400,000 and $450,000 income limits stated above. Taxable wages are subject to an extra 0.9% Medicare tax on single taxpayers with incomes above $200,000 and joint filers with incomes above $250,000. Employers will not need to pay this additional Medicare tax, which will be withheld from employees’ wages
The social security portion of the employee payroll tax on the first $113,700 (increased from $110,100 in 2012) of income goes back up to 6.2%, after having been reduced to 4.2% over the past two years
New phase-outs and limits on itemized deductions will apply to single taxpayers above $250,000 and joint filers above $300,000
The top marginal tax rate on estate taxes rises from 35% to 40% although the existing $5 million exemption per individual continues to apply
The Alternative Minimum Tax exemption amounts for 2012 were increased to $50,600 for individual taxpayers and $78,750 for joint filers. Further, this exemption will be permanently indexed to inflation in order to avoid the annual “patch” that was required to prevent it from impacting middle-class families