Considering buying a corporate aircraft? It isn't an easy decision, and we are available to help you figure out the non-tax impact of aircraft ownership (both financial and non-financial). But the purpose of today's blog is to set out the most significant tax rules affecting aircraft ownership. We think you'll be surprised by how favorable the rules are.
Business travel only. In most cases, if your company buys a plane used only for business travel, the company can deduct its entire cost in the year that it is placed into service. The cases in which the plane is ineligible for this immediate write-off are (1) the few instances in which neither the 100% bonus depreciation rules nor the “section 179” small business expensing rules apply or (2) when the taxpayer has elected out of 100% bonus depreciation and has not made the election to apply “section 179” small business expensing. In those cases the depreciation schedule is 20% of the cost for Year 1, 32% for Year 2, 19.2% in Year 3, 11.52% in Year 4, 11.52% in Year 5 and 5.76% in Year 6. Note that the bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.
Interestingly, the above “cost recovery” rules are more favorable than the rules for business autos. The business auto rules place annual caps on depreciation and, in the year an auto is placed in service, both depreciation and “section 179” small business expensing.
In the case of a business-travel-only aircraft, post-acquisition expenditures are treated no differently than post-acquisition expenditures for other machinery and equipment. So, for example, expenses for routine maintenance and repairs are immediately deductible while amounts that improve or restore the aircraft (such as amounts paid to overhaul an engine) must be capitalized and depreciated.
The only “catch” that distinguishes the tax treatment of an aircraft used 100% for business travel from the treatment of most other machinery and equipment is that company aircraft are one of the categories of business property that, by statute, require more rigourous recordkeeping to prove the connection of uses and expenditures to business purposes.
Business and personal travel. Personal travel won't affect the depreciation results discussed above if the value of the travel is compensation income (and is reported and withheld upon as such) to a person that isn't a (1) 5% owner or (2) person “related” to the corporation. This means, for example, that personal travel by a non-share-holding employee won't affect depreciation if the value of the travel is compensation to him or her and is reported and withheld upon as such. The depreciation results can be affected if the person for whom the value of the travel is compensation income is a 5% shareholder or a related person. But even in that case the depreciation results won't be affected if a generous “fail-safe” rule is complied with.
With one limitation, personal travel won't affect the treatment of otherwise-deductible post-acquisition expenditures if the value of the travel is compensation income (and is reported and withheld upon as such). The limitation is that if the person for whom the value of the travel is to be treated as compensation income is a 10% owner, director, officer, or a person “related” to the corporation, the amount of the deduction for otherwise-deductible costs allocable to the personal travel can't exceed the value of the travel.
An additional issue that can arise in the case of personal travel by a stockholder, and that is whether IRS can recharacterize as a dividend the value of travel treated as compensation. In that case the value is includible in the shareholder's income, but not deductible to the company. However, that possibility arises only if the traveler-stockholders compensation as increased by the value of the travel can be deemed excessive.
Moving forward. As you can see, the above rules, even in the case of an aircraft used for a mix of business and personal travel, aren't onerous. But they do require careful recordkeeping and, when an aircraft is used for personal travel, compliance with reporting and withholding requirements.