Corporate Jets and the IRS: Making Sense of Airplane Tax Regulations

With the world of business travel in full swing, the appeal of having a corporate airplane grows stronger. Imagine no more waiting in lines, no more crowded flights, and having the freedom to travel on your own terms.

When Does It Make Sense to Consider Purchasing a Corporate Airplane?

But before you make the leap and purchase that shiny new jet for your business, there’s something crucial you should know: the tax rules surrounding it. Surprisingly, many of these rules might work in your favor. Dive in as we break down the essentials of corporate airplane tax rules and what they mean for your business.

Changes in Bonus Depreciation Rules for Aircraft Starting 2023

Starting in 2023, corporate aircraft owners need to be aware of the evolving rules around bonus depreciation. These changes stem from the Tax Cuts and Jobs Act of 2017, specifically I.R.C. § 168(k)(2)(C), which, up until the end of 2022, had allowed for an enticing bonus depreciation of 100% of the cost for both new and used general aviation aircraft, provided they were used in business.

From 2023 onward, this lucrative bonus depreciation begins its phasedown. For an aircraft put into service in 2023, owners can deduct 80% of its cost. This deduction percentage drops by 20% each subsequent year, decreasing to 60% in 2024, and so on, until it reaches 0% in 2027.

However, there are some specific rules that apply to certain aircraft and transportation properties as per IRC Section 168(K)(2)(B). These specific assets have a one-year moratorium, which delays the phase-down from 100% to 80% until January 1, 2024, effectively extending the depreciation benefits for another year. This delay is applicable for aircraft that are bound by contracts or are delivered before January 1, 2024. To qualify, the aircraft must exceed a cost of $1 million and have a production period longer than a year.

“Transportation Property” is defined as aircraft used primarily for transporting goods or persons as part of a business operation like charter services. “Certain Aircraft,” on the other hand, refers to those not majorly used by charter-focused businesses. These “Certain Aircraft” can benefit from the one-year delay if:

• A nonrefundable deposit has been made which is the lesser of 10% of the cost or $100,000.
• The aircraft’s cost is at least $200,000.
• The estimated production duration exceeds four months.

For aircraft that meet the criteria for the one-year delay and are placed into service in 2023, the depreciation remains at a full 100%, decreasing by 20% annually until it’s exhausted. Those eyeing the delay for 2027 must ensure they have a binding purchase contract set before January 1, 2027, to benefit from the 20% bonus depreciation.

It’s also imperative to know the stipulations regarding aircraft usage. A minimum of 25% of the aircraft’s utilization should be for “qualified business use,” and it should exceed 51% for total business usage. With these upcoming changes, businesses must have a comprehensive tax plan to navigate not only the current tax year but also the implications for future years and other asset acquisitions.

Bonus Depreciation Ineligibility

A corporately-owned airplane is ineligible for this bonus write-off in the following cases:

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.

Interestingly, the airplane “cost recovery” rules are more favorable than those for business vehicles. The business auto rules place annual caps on depreciation and in the year a vehicle is placed in service they cap both depreciation and “Section 179” small business expensing.

In the case of a business-travel-only aircraft, post-acquisition expenditures are treated the same as post-acquisition expenditures for other machinery and equipment.

For example, expenses for routine maintenance and repairs are immediately deductible. However, amounts that improve or restore the aircraft (such as expenses paid to overhaul an engine) must be capitalized and depreciated.

The Catch: Record Keeping

The only “catch” that distinguishes the tax treatment of a company aircraft used 100% for business travel is the requirement for more rigorous record keeping. Unlike most other machinery and equipment, company planes are—by statute—one of the categories that need records to prove the connection of uses and expenditures for business purposes.

Corporate Airplane Tax Rules for Business AND Personal Travel

Personal travel will not affect corporate aircraft depreciation results if the value of the travel is compensation income (and is reported and withheld upon as such) to a person that is not a (1) 5% owner or (2) person “related” to the corporation.

Personal Travel for Non-Share-Holding Employee

For example, personal travel by a non-share-holding employee will not 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 will not be affected if a generous “fail-safe” rule is complied with.

Personal Travel Limitations

With one limitation, personal travel will not 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—when using the value of travel as compensation income—applies if the person is a 10% owner, director, officer, or a person “related” to the corporation. In that case, the amount of the deduction for otherwise deductible costs allocable to the personal travel cannot exceed the value of the travel.

An additional issue that can arise in the case of personal travel by a stockholder is whether the IRS can recharacterize as a dividend the value of travel treated as compensation. In this case, the value can be included in the shareholder’s income, but is not deductible to the company. However, that possibility arises only if the traveler-stockholder’s compensation, when increased by the value of the travel, can be deemed excessive.

Taking Flight with Confidence

The allure of the open skies combined with the convenience of owning a corporate jet is undeniable for many business owners. But, as with all significant investments, it’s crucial to approach with both eyes open. The tax landscape for corporate aircraft ownership, while largely favorable, demands careful record-keeping. When personal travel is in the mix, it’s important to ensure compliance with reporting and withholding requirements. With the right guidance and a clear understanding, you can navigate these rules and ensure that your jet-setting aspirations align with financial prudence. If you’re contemplating buying a corporate airplane, reach out to professionals who can guide you through the intricate dance of taxation and benefits. After all, owning a private jet is not just about reaching destinations—it’s about journeying with foresight and assurance.