Aerlex Law Group

Bonus Depreciation 2014

The United States Congress has passed legislation that retroactively renews 55 temporary tax breaks, including bonus depreciation for aircraft purchases.

Late Tuesday night, the Senate passed the Tax Increase Prevention Act of 2014 (the “TIP Act”) by a vote of 76-to-16 and sent the legislation to President Barack Obama, who has announced his intention to sign the bill into law. The House of Representatives had already passed the bill on December 3rd by a vote of 378-to-46.

The bill renews retroactively, back to January 1, 2014, a package of tax breaks, most of which had either expired at the end of 2013 or during 2014 and have been in limbo ever since. However, the legislation has no impact on the 2015 tax year.

Thanks to the retroactivity provision, aircraft buyers who entered into binding purchase agreements anytime during the 2014 calendar year can still benefit from the bill.

The TIP Act extends the 50% bonus depreciation provisions to property acquired and placed in service during the 2014 calendar year. Certain property is allowed an extended placed in service date through the end of 2015.

Aircraft purchasers who have already entered into a binding purchase agreement prior to December 31, 2014 and potential aircraft purchasers who intend to do so over the next two weeks would be eligible to qualify for 50% bonus depreciation if the 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, 2015, 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, 2015; and (5) is placed in service by the taxpayer before January 1, 2015. There is an extended “placed in service” date through the end of 2015 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, 2015 and still qualify for 50% bonus depreciation.

“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.

The TIP Act’s bonus depreciation provision allows taxpayers to continue electing to accelerate the use of Alternative Minimum Tax credits in lieu of bonus depreciation under special rules for property placed in service during 2014. The provision also continues a special accounting rule involving long-term contracts and a special rule for regulated entities. According to the Joint Committee of Taxation, the bonus depreciation provision will reduce tax revenues to the federal government by $1.492 billion over years 2015 through 2024.

The TIP Act also extends increased expensing limitations and treatment of certain real property as Internal Revenue Code section 179 property. The provision extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2013, which are $500,000 and $2 million, to property placed in service during the 2014 year. Currently, these amounts are $25,000 and $200,000, respectively. The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are also extended through 2014. According to the Joint Committee of Taxation, this provision will reduce federal tax revenues by $1.434 billion over the years 2015 through 2024.

Although the House had approved the spending resolution on December 3rd, the Senate delayed action for nearly two weeks, in part due to fierce opposition from liberal Democrats who objected to provisions that would curtail limitations on lender derivatives trading that are part of the Dodd-Frank law.

Regarding the congressional action, Aerlex Law Group President Stephen Hofer said: “With the end of the year fast approaching and a new tax filing season about to begin, Congress had to take some sort of action or the government would have been shut down once again. The Internal Revenue Service had already warned Congress that unless it acted quickly, the Service would be forced to delay the start of the tax filing season.” Hofer continued, “This is one of those rare instances when a gridlocked 113th Congress was finally able to take some bipartisan action and it was probably spurred, at least in part, by the impending arrival of the Congressional Christmas holiday and the fact that quite a few of the legislators are lame ducks.”

A section-by-section summary of House Resolution 5771, which started the TIP Act in the House of Representatives, can be viewed by clicking on the link below.


House Bill

Bonus Depreciation Summary