In an effort to jump-start the U.S. economy, lawmakers have enacted two significant amendments to the tax code that may lighten the tax burden of general aviation aircraft buyers who use an aircraft in furtherance of a trade or business. One change increases the expense election that may be taken when an aircraft is purchased (commonly referred to as a "section 179 expense election"). Another modification increases the current 30-percent special depreciation allowance for purchases of brand new aircraft to 50-percent.
Before the current changes to the tax law, an aircraft purchaser who used an aircraft for trade or business purposes had the option of electing to deduct up to $25,000 of the aircraft's cost in the year of purchase. This $25,000 deduction was reduced dollar for dollar by the amount the aircraft purchased (plus any other depreciable property purchased during the tax year) exceeded a $200,000 phase-out threshold.
The new law will modify the section 179 expense election by allowing an aircraft purchaser to elect a deduction of up to $100,000 for an aircraft placed in the service of the aircraft owner's trade or business for tax years 2003, 2004, and 2005. The new tax law also increases the $200,000 phase-out threshold to $400,000. Both the $100,000 expense election limitation and the $400,000 phase-out threshold may be increased through tax years 2004 and 2005 by inflation indexing authorized by the new law.
This change could provide a big tax benefit for general aviation aircraft purchasers. The new tax law may allow many light aircraft buyers who use their aircraft in a trade or business to take a deduction for all or a substantial part of their aircraft purchase price in the year of purchase.
In March 2002, President Bush signed the Job Creation and Worker Assistance Act (JCWA) into law. One of the more significant provisions of the JCWA was a special depreciation allowance. The special depreciation allowance permitted taxpayers purchasing "qualified property" an additional first-year depreciation deduction of 30 percent of the cost of the qualified property. Under the original version of the JCWA, purchases of brand-new aircraft between September 10, 2001, and before September 11, 2004, would typically qualify for the 30 percent special depreciation allowance.
The new version of the tax law will expand the 30 percent special depreciation allowance to a 50 percent allowance. Just as in the original version of the law, the only aircraft qualified for the special depreciation allowance will be brand-new aircraft purchased for use in a trade or business. The law also requires that the purchase be made between May 5, 2003, and January 1, 2005, and that the aircraft purchased be placed in the service of a trade or business before January 1, 2005. If the new aircraft is intended for use in the transportation of persons or property the placed in service date is extended to January 1, 2006. As with the original JCWA, a taxpayer may elect to forego the special depreciation allowance.
The special depreciation allowance will be calculated after any section 179 expense election and before regular depreciation in the year an aircraft is placed in the service of a trade or business. This change in the tax law may create a significant incentive for certain businesses to purchase new aircraft within the time limits prescribed by the law. However, any aircraft purchaser contemplating the use of the special depreciation allowance should also check with their state laws to see if state tax law conforms to federal tax law. With the backdrop of tightening state and local budgets, many state governments have opted to reject the adoption of a special depreciation allowance conformed to federal law.
As always, you should consult with your legal and/or tax counsel before purchasing an aircraft. The intent of this briefing is to familiarize you some very recent changes in the tax law. You'll need the assistance of someone familiar with your situation to guide you through the complexities of the new tax laws.