50 Percent Bonus Depreciation Is Available for Certain New Aircraft Contracted for in 2017 or 2018 and Placed in Service in 2018

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1 50 Percent Bonus Depreciation Is Available for Certain New Aircraft Contracted for in 2017 or 2018 and Placed in Service in 2018 Derek A. Bloom Scott C. Burgess Aviation Legal Group, P.A. Florida and Washington, D.C. November 1, 2017 The Internal Revenue Service ("IRS") has clarified that 50 percent bonus depreciation is available for certain new aircraft contracted for in 2017 or 2018 and delivered (and placed in service) in The IRS guidance is set out in a table in Section 4.03(2)(b) of Rev. Proc , 1 which is set out below. In the absence of the additional guidance provided Rev. Proc , bonus depreciation on new aircraft placed in service in 2018 would have been limited to 40 percent of the adjusted basis of the aircraft even if the purchase were contracted for in 2017, because Section 2(c)(3) of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act of 2015) amended Section 168(k) of the Internal Revenue Code ("IRC") by adding Section 168(k)(6) to provide for a phase-down of bonus depreciation from 50 percent to 40 percent in the case of property placed in service in 2018, and then to 30 percent for property placed in service from In what some experts consider to have been a drafting error, Section 2(c)(3) of the PATH Act of 2015 did not contain a transition rule to grandfather the 50 percent bonus depreciation rate generally allowed in 2017 by Section 168(k)(2)(C), in the event an aircraft were contracted for in 2017 and delivered in A Bill to create the Technical Corrections Act of 2016 was introduced in the 114th Congress amending Section 168(k)(6) to preserve 50 percent bonus depreciation in 2018 for aircraft contracted for in 2017, but that proposed legislation was not enacted into law. To date, no new version of this draft legislation has been introduced in the 115th Congress I.R.B (Apr. 20, 2017). 2 The extension of bonus depreciation under the PATH Act of 2015 is generally explained in Extension of Bonus Depreciation by John B. Hoover and Richard. C. Farley, Jr. (Dec. 18, 2015) on the NBAA website. 1

2 In early 2016, representatives of the NBAA Tax Committee met with Department of the Treasury and IRS staff to explain this apparent drafting error in the PATH Act of 2015, and subsequently spoke with attorneys in the IRS Chief Counsel s office about the issue. At that time, the IRS Chief Counsel s office did not intend to correct the apparent drafting error, since they expected that the error would be fixed through technical corrections legislation (which as noted above was not ultimately enacted). The IRS staff has subsequently taken the view that there is an unintended ambiguity in Section 168(k)(6), which includes a transition rule allowing the 40 percent bonus depreciation rate (which is generally applicable to property placed in service in 2018) for qualifying aircraft contracted for in 2018 and placed in service in However, due to an apparent legislative oversight or drafting error, Section 168(k)(6) does not provide a transition rule allowing the 50 percent bonus depreciation rate (which is generally applicable to property placed in service in 2017) for aircraft contracted for in 2017 and placed in service in The IRS Chief Counsel s office considered that the PATH Act of 2015 specifically provides for 40 percent bonus depreciation for aircraft contracted for in 2018 and placed into service in 2019, but lacks a corresponding rule for aircraft contracted for in 2017 and placed in service in The staff viewed the prior existence of draft legislation, the "Technical Corrections Act of 2016," which would have provided legislative clarification, as representing only an "alternative view" that legislation was required to fix the ambiguity in the PATH Act of The IRS Chief Counsel s office concluded the IRS may interpret the absence of such an express statement as leaving the Department of the Treasury with authority to correct the apparent drafting error through the issuance of Rev. Proc Thus, the IRS's view, now published in Rev. Proc on which taxpayers may rely, is that 50 percent bonus depreciation is available for certain new aircraft contracted for in 2017 or in 2018 and delivered (and placed in service) in The fix provided by Rev. Proc is extra-generous because the IRS guidance sets the contract cut-off date by which the purchase must be contracted for as before January 1, Since there is no phase down rule in Section 168(k)(6), the IRS looked to the general cutoff date in Section 168(k)(2)(B)(i)(III). This means a taxpayer may contract to purchase a new aircraft in 2018 and qualify for 50 percent bonus depreciation in 2018 if the aircraft is also placed into service in The table setting out the IRS guidance in Section 4.03(2)(b) of Rev. Proc provides that 50 percent bonus depreciation is available for "Certain Aircraft" or Transportation Property that are "qualified property." 4 The determination of whether a 3 A parenthetical reference in Section 168(k)(6)(A) provides that 40 percent bonus depreciation would apply in the case of property placed in service in 2019 and described in paragraph (2)(B) or (C) (determined by substituting 2019 for 2020 in paragraph (2)(B)(i)(III)...)). 4 Section 4.03(2)(b) of Rev. Proc provides: 2

3 taxpayer's aircraft is qualified property and meets the requirements to be Certain Aircraft within the meaning of Section 168(k)(2)(B) or Transportation Property under Section 168(k)(2)(C) will depend on the relevant facts and circumstances. The special rule in Section 168(k)(2)(C) for Certain Aircraft is the provision that most owners of business aircraft will want to qualify for to be eligible to use the 50 percent bonus depreciation rate under the transition rule for aircraft placed in service in This section requires: The table below provides the additional first year depreciation deduction percentages for qualified property that is described in 168(k)(2)(B) or (C): Placed-in-Service Year Acquired, or Acquired Pursuant to a Written Contract Entered Into: Additional First Year Depreciation Deduction Percentage 2016 Before % 2017 Before % 2018 Before % 2019 Before % * 2019 During % * 2020 Before % ** 2020 After % After 2020 Before 2020 or After % * For qualified property described in 168(k)(2)(B) and placed in service in 2019 but acquired, or acquired pursuant to a written contract entered into, before 2019, the 40% manufacture, construction, or production before January 1, See 168(k)(2)(B)(ii) and (6)(A) and 1.168(k)-1(d)(1)(ii), taking into account section 4.01(3) of this revenue procedure. For qualified property described in 168(k)(2)(B), placed in service in 2019, and acquired, or acquired pursuant to a written contract entered into, in 2019, the 30% manufacture, construction, or production before January 1, For qualified property described in 168(k)(2)(C) and placed in service in 2019, the 30% and 40% apply to the property s unadjusted depreciable basis. ** For qualified property described in 168(k)(2)(B) and placed in service in 2020 but acquired, or acquired pursuant to a written contract entered into, before 2020, the 30% manufacture, construction, or production before January 1, See 168(k)(2)(B)(ii) and (6)(B) and 1.168(k) 1(d)(1)(ii), taking into account section 4.01(3) of this revenue procedure. For qualified property described in 168(k)(2)(C) and placed in service in 2020 but acquired, or acquired pursuant to a written contract entered into, before 2020, the 30% applies to the property s unadjusted depreciable basis. 5 Section 168(k)(2)(B) (applicable to Transportation Property ) limits the basis that may qualify for the transition rule to the amount paid or incurred by the end of the year in which the purchaser entered into the binding contract to purchase the aircraft. Therefore, in the case of Transportation Property, the portion of the basis paid or incurred in the subsequent year in which the actual delivery and placed in service date occurred would be depreciated using the bonus depreciation rate applicable in such subsequent year. Since the transition rule in Section 168(k)(2)(C) applicable to Certain Aircraft does not contain this basis limitation, it would ordinarily be preferable for business aircraft to qualify for the transition rule applicable to Certain Aircraft rather than the transition rule applicable to Transportation Property. 3

4 - the original use of the aircraft must commence with the taxpayer, i.e., the aircraft must be new; 6 - the aircraft must be placed in service before January 1, 2021, to qualify for bonus depreciation 7 (and before the end of 2018 to qualify for the 50 percent bonus depreciation rate) (The 30 percent bonus depreciation rate will apply for aircraft placed in service in 2019 generally, and in 2020 under the transition rule.); - the aircraft must be acquired by the taxpayer (or pursuant to a written contract entered into) before January 1, 2020; 8 - the aircraft must not be Transportation Property as defined in Section 168(k)(2)(B)(iii), 9 which means tangible personal property used in the trade or business of transporting persons or property; 10 - the aircraft is purchased, and the contract for the purchase provides for a nonrefundable deposit of the lesser of 10 percent of the cost or $100,000; 11 and - the aircraft has an estimated production period exceeding 4 months and a cost exceeding $200, In the absence of further legislation, taxpayers must rely upon the guidance provided by Rev. Proc As of late September 2017, it is unknown whether any tax legislation will be enacted to implement the legislative fix that would have been made by the "Technical Corrections Act of 2016." 6 See Section 168(k)(2)(C)(i) which refers to Section 168(k)(2)(A)(ii). 7 See Section 168(k)(2)(C)(i) which refers to Section 168(k)(2)((B)(i)(II). 8 See Section 168(k)(2)(C)(i) which refers to Section 168(k)(2)((B)(i)(III). 9 See Section 168(k)(2)(C)(ii) which refers to Section 168(k)(2)((B)(iii). 10 Section 168(k)(2)(B)(iii) defines Transportation property simply as tangible personal property used in the trade or business of transporting persons or property. There is no definitive guidance from the IRS further clarifying the definition. Presumably, the IRS would interpret the definition of Transportation Property with reference to the primary use of the aircraft by the taxpayer (or by the lessee in the case of leased aircraft) in accordance with the general rule that the depreciation life and method is determined based on the primary use of the property. See Treas. Reg. Sec (a)-11(b)(4)(iii)(b), 1.168(i)-4(d)(2). However, the wording of the statutory definition of Transportation Property arguably suggests that any use in the trade or business of transporting persons or property would cause the aircraft to be Transportation Property.. 11 See Section 168(k)(2)(C)(iii). 12 See Section 168(k)(2)(C)(iv). 4

5 However, if the current tax reform bill is signed into law, the bill would allow businesses to immediately expense the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1,