Phasedown of Bonus Depreciation for Aircraft Begins in 2023

This Holland & Knight alert explains the phasedown of bonus depreciation for aircraft beginning in 2023. Through 2022, bonus depreciation has been allowed for 100 percent of the cost of qualifying property (which generally includes new or used aircraft as long as the taxpayer did not previously own the aircraft and the qualified business use requirements under Internal Revenue Code (I.R.C.) Section 280F(b) are met). Beginning in 2023, the bonus depreciation percentage will be phasing down.

The general rule under I.R.C. § 168(k)(6) is that beginning in 2023, the applicable percentage for bonus depreciation will be phased down by 20 percent per year. Therefore, under the general rule, an aircraft placed in service in 2023 will be eligible for 80 percent bonus depreciation, in 2024 will be eligible for 60 percent bonus depreciation, and so on. I.R.C. § 168(k)(6)(A).

However, "Transportation Property" described in § 168(k)(2)(B) and "Certain Aircraft" described in § 168(k)(2)(C) will have a one-year delay in the phasedown. Thus, such property will be eligible for 100 percent bonus depreciation if placed in service in 2023, 80 percent bonus depreciation if placed in service in 2024, and so on. I.R.C. § 168(k)(6)(B).

Transportation Property includes aircraft used in the trade or business of the transportation of persons or property (e.g., charter service), while Certain Aircraft generally means aircraft that are not Transportation Property. I.R.C. § 168(k)(2)(B)(i)(IV), (B)(iii), (C)(ii). Presumably, the classification as Transportation Property or Certain Aircraft will be made based on the primary use of the aircraft. See Treas. Reg. § 1.167(a)-11(b)(4)(iii)(b); Treas. Reg. § 1.168(i)-4(d)(2).

To qualify for the one-year delay of the phasedown as Transportation Property or Certain Aircraft, the aircraft must be acquired by the taxpayer (or acquired pursuant to a written binding contract entered into) before Jan. 1, 2027. I.R.C. § 168(k)(2)(B)(i)(III), (C)(i). This requirement will ordinarily be met for aircraft acquisitions prior to 2027. The absence of a requirement to have a binding written contract prior to Dec. 31, 2022, to be eligible to use the 100 percent bonus depreciation percentage in 2023 may not have been intended by Congress. However, the statute undoubtedly controls as written, so the IRS would have no basis on which to assert that a binding written contract must be in place by Dec. 31, 2022, for a taxpayer to be eligible to use the 100 percent bonus depreciation rate in 2023.

For an aircraft that is Transportation Property to qualify for the one-year delay, the aircraft must have an estimated production period exceeding one year and a cost exceeding $1 million. I.R.C. §§ 168(k)(2)(B)(i)(VI), 263A(f)(1)(B)(iii). Since business aircraft typically do not have a production period exceeding one year, it is typically difficult for aircraft used primarily for charter service (i.e., as Transportation Property) to qualify for the one-year delay.

For an aircraft that is Certain Aircraft (i.e., not Transportation Property) to qualify for the one-year delay, the taxpayer must, at the time the contract to purchase the aircraft is entered into, make a nonrefundable deposit of at least the lesser of 10 percent of the cost of the aircraft or $100,000. I.R.C. § 168(k)(2)(C)(iii). This provision does not require that the contract for purchase be entered into at any particular time, but it does impose the deposit requirement on the date the contract to purchase the aircraft is in fact entered into.

In addition, for an aircraft that is Certain Aircraft to qualify for the one-year delay, it must have an estimated production period that exceeds four months. I.R.C. § 168(k)(2)(C)(iv)(I). Presumably, this requirement is met for most aircraft, but it is advisable to confirm it.

Finally, for an aircraft that is Certain Aircraft to qualify for the one-year delay, it must have a cost in excess of $200,000. I.R.C. § 168(k)(2)(C)(iv)(II).

If all of the above requirements for the one-year delay are met, the aircraft will qualify for the one-year delay of the placed in service date. Therefore, the bonus depreciation percentage for such qualifying Transportation Property or Certain Aircraft placed in service in 2023 is 100 percent, in 2024 is 80 percent, in 2025 is 60 percent, and in 2026 is 40 percent.

However, for such aircraft to qualify for the one-year delay of the 20 percent rate for aircraft placed in service in 2027, the acquisition rule above requires that there must be a binding written contract to acquire the aircraft in place prior to Jan. 1, 2027. If this occurs for Transportation Property, then only the basis in the aircraft accrued prior to Jan. 1, 2027, can be included in the 20 percent bonus depreciation available for such aircraft placed in service in 2027. § 168(k)(2)(B)(ii).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.