Business Aviation Set for Big Gains From the Tax Cuts and Jobs Act of 2017, H.R.1
For some time now, critics have argued that the US aviation sector is in need of an overhaul. Or at the very least, some significant restructuring. In order to make this happen, industry leaders have previously gathered to explore their options. But has anything actually come of it?
A year in the making
It’s been a full year now since 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? To lower the tax burden on American businesses, particularly in terms of aviation. In the months following the meeting, many questioned what – if anything – would come of it. But now, with the introduction of the Tax Cuts and Jobs Act of 2017, H.R.1., it looks like changes may be arriving sooner rather than later.
Tax Cuts and Jobs Act of 2017, H.R.1
H.R.1 has 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 can work out very favorably.
An existing 2015 Act utilizes a bonus depreciation scheme. Property that is used in a trade or business is eligible for qualification, and this includes both commercial and non-commercial aircraft. This is assuming they have a recovery period of no more than 20 years. If eligible, the property has a phase-down from 50% to 30%.
However, whilst the new Tax Bill maintains the same qualification criteria, the numbers jump steeply. Taxpayers can now take advantage of 100% expensing as of 27th September 2017, up until 2023. And after that, it will again phase down 20% each year until it reaches 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 to be made on new and used aircraft
Another crucial change is that this generous Tax Bill applies to both new and used aircraft. Previously the 2015 Act had only applied to new aircraft. This opens up the door to much more affordable and profitable investments for savvy business users.
Anybody involved in the purchase or sale of aircraft stand to benefit. But it is also positive news for those who want to lease an aircraft or assist in the management aspect of business aviation. This is due to a long list of benefits including expensing of the aircraft for the next 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 is adjusted to only permit such a rule for real property. But this is offset against the 100% expensing of both new and used property. What’s more, f the buyer had got rid of the property by 31st December 2017, they would retain the pre-existing like-kind exchange agreement.
Increase in sales predicted
So, what does this mean for business aviation as a whole? In short, it’s pretty good news. The obvious short-to-medium-term effect is that the aviation game is becoming more affordable. This should make it easier for dealers to sell used aircraft. And crucially this could also lead to a spike in sales of new aircraft, increasing the number of vehicles operating in the industry as a whole.
Management companies will be reassured by a certain degree of protection that H.R.1 provides. The impact of FET looks like it will be 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 will surely increase 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 will have to be shrewd when establishing deals. If done correctly, the tax benefits would have a noticeable impact on the businesses.
We are entering the most beneficial period for buyers and sellers according to the changes dictated by the H.R.1 development. The opportunity to achieve up to 100% expensing in the first year will certainly not go unnoticed by those operating businesses in the aviation sector, and it will certainly be interesting to see the impact this has on the market as a whole over the coming few years.