Bonus Depreciation: 2013

09 Jan 2013


Bonus Depreciation Extended for 2013

As the year 2012 came to a close and the year began, the American Taxpayer Relief Act of 2012 was enacted that among other items, extended the 50% “bonus depreciation” allowance for certain qualified property through the end of 2013. Therefore for qualifying business aircraft acquired and placed in service on or before December 31, 2013, a 50% bonus depreciation deduction may be applicable with the remaining basis depreciated under general depreciation rules.


In order for the aircraft to qualify for the 50% bonus depreciation, the aircraft must be “qualified property” and meet the following requirements:


1. The property must have a recovery period of 20 years or less. Business aircraft generally have a recovery period of 5 or 7 years.


2. The original use of the property must commence with the taxpayer after December 31, 2007. “Original use” is defined as the first use to which the property is put, whether or not that use corresponds to the use of the property by the taxpayer. For purchases of fractional interests in aircraft, if a taxpayer in the ordinary course of its business sells fractional interests in aircraft to third parties unrelated to the taxpayer, each first fractional owner of the aircraft is considered the original user of its proportionate share of the aircraft.


3. The property is acquired by the taxpayer after December 31, 2007 and before January 1, 2014, but only if no written binding contract for the acquisition was in effect before January 1, 2008. Or the property is acquired by the taxpayer pursuant to a written binding contract which was entered into after December 31, 2007, and before January 1, 2014. “Binding contract” is defined to mean a contract is binding only if it is enforceable under the state law against the taxpayer or a predecessor, and does not limit damages to a specified amount (for example the use of a liquidated damages provision). However a contractual provision that limits damages to an amount equal to at least 5 percent of the total contract price will not be treated as limited damages to a specified amount.


4. The property must be placed in service for use in its trade or business or for production of income by the taxpayer before January 1, 2014.


Aircraft qualifying for bonus depreciation under the Act must also otherwise be eligible under other qualifying tests for Modified Accelerated Cost Recovery System Depreciation (MACRS) such as meeting business use tests and operation predominately in the United States.


The “bonus” depreciation is an additional first-year deduction equal to 50% of the adjusted basis in the property. The adjusted basis is then reduced by the amount of such deduction before computing the amount otherwise allowable as a depreciation deduction under IRC 168. Regular depreciation for most business aircraft is computed on a 5-year recovery period using the modified accelerated cost recovery method which is generally 20% of the adjusted basis in the first year. Therefore if the adjusted basis of an aircraft is $10,000,000, 50% bonus depreciation will equal $5,000,000 in addition to the first-year depreciation of $1,000,000 (20% of the remaining basis after deducting the 50% allowance) for a total of $6,000,000 in first year depreciation.


Stay tuned as to if bonus depreciation will yet again be extended for the 2014 tax year.


This communication is provided for general information and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Readers are encouraged to consult competent counsel to advise such reader regarding matters relating hereto.


IRS CIRCULAR 230 DISCLOSRE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advise contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.