Territorial Limitations - Aviation Insurance & Risk Management ...
Territorial Limitations - Aviation Insurance & Risk Management ... Territorial Limitations - Aviation Insurance & Risk Management ...
KraftCPAs PLLC Author: Craig A. Max, IV, CTEP Technical Review: Valerie Shelton, CPA, PFS, CFP ® Lee S. Kraft, CPA, MBA KraftCPAs PLLC is one of the largest, independent certified public accounting firms in Tennessee. Headquartered in Nashville since its 1958 inception, the firm has over 100 employees and six affiliated companies, providing services to businesses and high net worth individuals. An independently owned member of the RMS McGladrey Network, with affiliates worldwide, KraftCPAs offers clients the resources of a national firm, while maintaining the high-touch, personal service that is recognized as being synonymous with Kraft. With KraftCPAs, clients get the best of both worlds. For more information, call Lee S. Kraft, CPA, MBA Phillip N. Duncan, CPA, PFS Valerie Shelton, CPA, PFS, CFP ® Craig A. Max, IV, CTEP 615-242-7351 or visit us online: www.kraftcpas.com 24 Aviation Insurance & Risk Management AIRCRAFT TAX PLANNING Appreciating the Depreciation Tax Treatment for Business-Use Aircraft by Craig A. Max, IV In addition to the many logistical effi ciencies that business aircraft ownership can provide, an aircraft can also serve as an excellent tax-advantaged investment with a short depreciable tax life and signifi cant residual value. When a business or individual buys an aircraft to be used for business purposes, Generally Accepted Account Principles in the U.S. (GAAP) require that the acquisition cost be spread out for fi nancial reporting purposes over the estimated useful life of the aircraft, which may be 20 to 30 years or more. Therefore, only a relatively small portion of that cost will be charged against reported earnings in any one year. This expense recognition over time is classifi ed as depreciation expense. In contrast to the GAAP rules, the Internal Revenue Code allows taxpayers to deduct the cost of the aircraft for tax purposes over a much shorter recovery period. The following discussion reviews some of the major concepts of aircraft depreciation assuming 50% or more of the use of the aircraft is for business purposes. If your aircraft is used more for personal than business use, the Alternative Depreciation System (ADS) would apply. In either case, the regulations governing cost recovery can be complicated, and the mechanics of calculating your specifi c depreciation deduction are outside the scope of this article. Aircraft owners are encouraged to seek out a qualifi ed tax professional to review individual circumstances.
Tax Depreciation Methods AIRCRAFT TAX PLANNING For tax purposes, there are two general systems for determining the depreciation expense deduction: straight-line and accelerated. The straight-line method generally mirrors GAAP requirements. The total cost of the aircraft is evenly deducted over the statutory recovery period required for tax purposes, as discussed further below. Planes placed in service before 1981 are generally depreciated using the straight-line method. Alternatively, an aircraft owner may use an accelerated cost recovery method. These methods are considered “accelerated” because, rather than deducting an equal amount of the acquisition cost of the aircraft each year, the taxpayer recovers a larger portion of the cost in the earlier years of ownership and a smaller portion in the later years. The concept of accelerated depreciation is easily understood by analogy to a new automobile. The moment a new car is driven off the dealer’s lot, its market value is signifi cantly reduced. Aircraft placed in service between 1981 and 1986 are generally depreciated using the Accelerated Cost Recover System (ACRS). Aircraft placed in service after 1986 are generally depreciated using the Modifi ed Accelerated Cost Recovery System (MACRS). While the calculations are different under ACRS or MACRS, both result in recovering a proportionately larger amount of the aircraft’s cost in the early years. In all cases, the percentage of business usage must be applied to the depreciation amount calculated in order to arrive at the allowable deduction. Useful Life of Aircraft One of the unique features of the tax depreciation rules is the fi xed useful life. Rather than attempting to estimate the useful life of your aircraft, the tax code provides standard asset lives or “recovery periods”, depending on whether the aircraft is used primarily for commercial transportation of passengers or freight (generally operating under FAR Part 135) or for internal corporate transportation (generally operating under FAR Part 91). The chart on the following page provides the statutory aircraft recovery periods required for tax purposes.
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Tax Depreciation Methods<br />
AIRCRAFT TAX PLANNING<br />
For tax purposes, there are two general systems for determining the depreciation expense deduction: straight-line and<br />
accelerated. The straight-line method generally mirrors GAAP requirements. The total cost of the aircraft is evenly deducted<br />
over the statutory recovery period required for tax purposes, as discussed further below. Planes placed in service before<br />
1981 are generally depreciated using the straight-line method.<br />
Alternatively, an aircraft owner may use an accelerated cost recovery method. These methods are considered “accelerated”<br />
because, rather than deducting an equal amount of the acquisition cost of the aircraft each year, the taxpayer recovers a<br />
larger portion of the cost in the earlier years of ownership and a smaller portion in the later years. The concept of accelerated<br />
depreciation is easily understood by analogy to a new automobile. The moment a new car is driven off the dealer’s lot, its<br />
market value is signifi cantly reduced. Aircraft placed in service between 1981 and 1986 are generally depreciated using the<br />
Accelerated Cost Recover System (ACRS). Aircraft placed in service after 1986 are generally depreciated using the Modifi ed<br />
Accelerated Cost Recovery System (MACRS). While the calculations are different under ACRS or MACRS, both result in<br />
recovering a proportionately larger amount of the aircraft’s cost in the early years. In all cases, the percentage of business<br />
usage must be applied to the depreciation amount calculated in order to arrive at the allowable deduction.<br />
Useful Life of Aircraft<br />
One of the unique features of the tax depreciation rules is the fi xed useful life. Rather than attempting to estimate the useful<br />
life of your aircraft, the tax code provides standard asset lives or “recovery periods”, depending on whether the aircraft is<br />
used primarily for commercial transportation of passengers or freight (generally operating under FAR Part 135) or for internal<br />
corporate transportation (generally operating under FAR Part 91). The chart on the following page provides the statutory<br />
aircraft recovery periods required for tax purposes.
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