Business Aviation After the Tax Cuts and Jobs Act of 2017, H.R.1
At some point a few years back, critics argued that the US aviation sector was in need of an overhaul or at least some significant restructuring. In order to make this happen, industry leaders gathered to explore their options and what actually came of it is the Tax Cuts and Jobs Act.
A Year in the Making
A top-level meeting was held to explore the future of the aviation industry. With Delta announcing they’d be making an extra 25,000 jobs almost immediately after the meeting, it was seen as quite a success. But one bone of contention that kept rearing its head was taxes.
The promise came to lower the tax burden on American businesses, particularly in terms of aviation. In the months following the meeting, the Tax Cuts and Jobs Act of 2017, H.R.1. was introduced giving hope that changes were arriving sooner rather than later.
Tax Cuts and Jobs Act of 2017, H.R.1
H.R.1 offered a number of benefits for people looking to buy either a new or used business aircraft, and by meeting a few criteria the tax implications could work out very favorably.
A previous 2015 Act was based on a bonus depreciation scheme. According to it, property used in a trade or business was eligible for qualification, and this included both commercial and non-commercial aircraft. This was assuming they had a recovery period of no more than 20 years. If eligible, the property had a phasedown from 50% to 30%.
Whilst the new Tax Bill maintained the same qualification criteria, the numbers jumped steeply. Taxpayers could, and still can, take advantage of 100% expensing as of 27th September 2017, up until 2023. And after that, it would again phase down 20% each year until it reached 0%.
This means it is possible to fully expense the aircraft 100% in the same year it’s put into service, which is a hugely appealing prospect for anybody considering purchasing a business jet. In order to be eligible, the aircraft must be used for business at least 50% of the time.
Savings on New and Used Aircraft
Another crucial change is that the generous Tax Bill applies to both new and used aircraft. Previously, the 2015 Act had only applied to new aircraft. This opened up the door to much more affordable and profitable investments for savvy business users.
Anybody involved in the purchase or sale of aircraft got benefitted. But it was also positive news for those who wanted to lease an aircraft or assist in the management aspect of business aviation. A long list of benefits includes expensing of the aircraft for the following five years and the exemption of aircraft management fees from federal excise taxes (FET). Plus, a series of perks for tax leasing along the way.
The retraction of like-kind exchanges is a particularly intriguing aspect of H.R.1. This unique rule of the Internal Revenue Code (IRC) 1031 means that no gains nor loss are recognized in a like-kind exchange where the replacement property is purchased for productive use in a trade or business. Or for investment purposes.
Under the H.R.1 modification this was adjusted to only permit such a rule for real property. But this was offset against the 100% expensing of both new and used property. What’s more, if the buyer had got rid of the property by 31st December 2017, they would have retained the pre-existing like-kind exchange agreement.
Increase in Sales
What did this mean for business aviation as a whole? In short, it was good news. The obvious short-to-medium-term effect was that the aviation game became more affordable. It became easier for dealers to sell used aircraft. And, crucially, it led to a spike in sales of new aircraft, increasing the number of vehicles operating in the industry as a whole.
Management companies are reassured by a certain degree of protection that H.R.1 provides. The impact of FET got significantly reduced thanks to the introduction of a new term “aircraft management services”. This covers a wide number of aviation aspects from slight and administrative procedures to lesser support services, all at the behest of aircraft owners or those leasing the aircraft. In short, it’s a blanket term which arguably affords quite a bit of leeway.
The number of completed aviation transactions increased as a result of the H.R.1 news. But in order to truly maximize on the potential savings that can be made here, aviation businesses should be shrewd when establishing deals. When done correctly, the tax benefits have a noticeable impact on the businesses.
This beneficial period for buyers and sellers according to the changes dictated by the H.R.1 development is continuing in the businesses aviation sector, and it will certainly be interesting to see its further impact on the market.