Smart companies are increasingly using private aviation as a business tool. It’s rare that we get a client who simply wants to purchase a plane without already having determined that an aircraft will address a business need. Sometimes the need is to assist with new client prospects and sometimes it’s to increase the business’ logistical abilities. The fact is, there are many different reasons why a business decides to invest in private aviation, but rarely (if ever) is it done without serious thought given to solving a business need.
Once determining that private aviation will meet a specific need, many businesses, especially if their companies are undergoing growth, strive to find smart ways to defray their tax burdens.
For companies with adequate income and real business travel need, there are several private aviation tax benefits that can be embraced. These benefits allow businesses to reduce their taxable income, though many business owners are unaware of them. In the past, Congress has extended these options, but oftentimes have waited to the end of the year. For 2016, these options have already been extended, allowing businesses to plan like never before and take advantage of their business aircraft throughout 2016. Here are three tax extensions of which advisors should be aware:
- MACRS depreciation: When writing off the total cost of your airplane, there are two methods. First, is a straight-line depreciation, which allows business owners to write off the entire cost of an airplane over five years at 20 percent per year. The second is the modified accelerated cost recovery system (MACRS) double declining balance of depreciation method. It allows businesses to write off the total amount, but with an increased amount over the first two years. With this incentive, you can write off 20 percent of the aircraft’s price in the first year and 32 percent the second, with amounts averaging out the final three years.
For a company experiencing a period of growth, this is a great way to reduce that burden as well as give you an additional tool to enhance that development. One thing to remember is that in order to write off the full 20 percent the year the aircraft is purchased, it must be purchased before September 30.
- Bonus depreciation: While five-year depreciation is great, it is not the only incentive available. One tax benefit that was recently extended by the United States Government is bonus depreciation. This allows a 50 percent write off on a brand new airplane in the first year. As opposed to spreading this out over several years, businesses can get immediate tax relief. While this tax benefit can be coupled with the standard five-year depreciation model, it must be handled correctly. If an individual purchases a $3.5 million aircraft, a whopping $1.75 million can be depreciated based on this incentive. However, when calculating your five-year depreciation, that five-year model is then based on the remaining $1.75 million that has yet to be written off.
- Section 179 expensing: Another write off recently extended by the government is Section 179 expensing. Section 179 allows businesses to write off up to $500,000 with the purchase of an airplane under $2 million. This enables businesses to write off this initial amount, in addition to the five-year depreciation on the remaining amount.
When reviewing your client’s tax burden and making the decision to purchase an airplane, being informed is of the utmost importance. While these tax benefits are there to be used, it’s critical to work with trusted partners who are aviation tax professionals. By working with a tax professional who specializes in private aviation, your risk of audit drops immensely.
With Congress extending these incentives through 2016, it’s the perfect time to assess tax burdens and begin to plan for the future. For an individual with both a business need for an airplane and a tax burden, an aircraft can provide needed relief.