President Obama signed the Small Business Jobs Act of 2010 (the
"Act") into law on Sept. 27, 2010. The Act, which
provides numerous tax breaks to small and large businesses, extends
first-year bonus depreciation through Dec. 31, 2010 (as well as
Dec. 31, 2011 for certain aircraft and long-production-period
property). The Act's extension of bonus depreciation creates a
valuable opportunity for companies planning to purchase new
aircraft property in 2010 and, in some cases, 2011.
Bonus depreciation entitles taxpayers to additional depreciation
deductions equal to 50 percent of the adjusted basis of
"qualified property" in the year that the property is
placed in service. "Qualified property" includes assets
to which the modified accelerated cost recovery system (MACRS)
rules apply and that have recovery periods of 20 years or less.
Commercial and non-commercial aircraft, which have 5- and 7-year
recovery periods, respectively, generally are subject to MACRS. To
further satisfy the definition of "qualified property"
and qualify for bonus depreciation, such aircraft generally must be
new property in the hands of the taxpayer and must be placed in
service before Jan. 1, 2011 (or Jan. 1, 2012 in the case of certain
aircraft and long-production-period property). Fractional aircraft
interests also qualify for bonus depreciation as long as an
interest was previously owned by the fractional program itself. In
other words, there may be no previous owner of the fractional
interest in order to qualify for bonus depreciation.
Taxpayers benefit from the extension of bonus depreciation in that
it greatly accelerates depreciation deductions and, therefore,
deductible expenditures for 2010. Assume, for instance, that a
taxpayer places new non-commercial aircraft in service on Nov. 1,
2010. The adjusted basis of the new aircraft is $8 million. The
taxpayer's first-year bonus depreciation deduction in 2010
would be $4 million, with the remaining $4 million depreciated over
a 5-year period. Absent bonus depreciation, the taxpayer's
first-year depreciation deduction for the aircraft would be limited
to $1.6 million.
The Act further extends the placed-in-service date for
"transportation property," which is deemed to be
long-production-period property and "certain aircraft"
through Dec. 31, 2011 (provided that such property was contracted
for after Dec. 31, 2007). The Internal Revenue Code (the
"Code") defines "transportation property" to
include tangible personal property that is used in the trade or
business of transporting persons or property. "Certain
aircraft," on the other hand, are aircraft that are not
"transportation property," which costs more than $200,000
and which has an estimated production period in excess of 4 months.
To the extent that a taxpayer places an aircraft in service prior
to Jan. 1, 2012, and such aircraft qualifies as transportation
property or certain aircraft under the Code, the taxpayer will be
eligible for bonus depreciation through 2011. The taxpayer's
bonus depreciation for transportation property, however, will be
limited to that portion of the aircraft's adjusted basis
attributable to manufacture, construction or production that
occurred prior to Jan. 1, 2011.
Aircraft purchases made after Dec. 31, 2010 (or Dec. 31, 2011 in
the case of transportation property or certain aircraft) will not
qualify for bonus depreciation. Companies planning to purchase
aircraft in the near future should consider accelerating such
purchases to take advantage of favorable bonus depreciation
extensions. It is important to note that first-year bonus
depreciation deductions are available to taxpayers regardless of
the date in which qualified property is placed in service in 2010
(or 2011 in the case of transportation property or certain
aircraft). So long as a taxpayer places eligible aircraft in
service at any time on or before Dec. 31, 2010 (or Dec. 31, 2011 in
the case of transportation property or certain aircraft), the
taxpayer will be eligible for first-year bonus depreciation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.