Avionomics

Buried in the recent economic stimulus package is a provision you might find interesting. 

by Gary I. Horowitz

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The Economic Stimulus Act of 2008, signed into law by the President this February, is intended to help the economy by encouraging consumers to spend. Average consumers receive checks — $1,200 per couple plus $300 per child.

Not-so-average consumers don’t get checks, but if they happen to be in the market for a new plane, they might get to enjoy some windfall tax deductions. The stimulus law allows taxpayers to take a 50 percent “bonus” depreciation on new aircraft purchases. For a $20 million plane, you can surely do the math. This is the kind of “bonus” that usually only hedge-fund managers get to pocket.

In short, 50 percent of the cost of brand-new business aircraft purchased in 2008 and placed into service this year (that date has been extended through 2009 for certain aircraft) can be deducted in the year acquired. Plus, the purchaser can still take normal depreciation deductions.

And if the aircraft’s purchase was financed, the interest on the loan can be deducted. And it’s also possible to defer taxable gain on the sale of a currently owned aircraft through a Section 1031 like-kind exchange. Whatever else people might say about George W. Bush, he certainly makes aviation-friendly tax policy.

This isn’t the first time the Bush administration has been possessed of such largesse. The “new” bonus depreciation is not really new, but actually a virtual repeat of an expired/extended 2001/2004 stimulus plan.

“The law Lets taxpayers take a 50 percent ‘bonus’ depreciation on new plane purchases. This is the kind of ‘bonus’ that only hedge-fund managers usually get.”

It should probably be noted that a Michigan survey found that the 2001 bonus depreciation had modest stimulating effects on the economy and no real increase in long-term productivity, and according to Citizens for Tax Justice, the new bonus depreciation will cost the U.S. Treasury $65 billion. But I digress. This is not a public policy column. It’s a column to help you realize enough in tax savings this year to potentially put several children through college (and graduate school).

Here are the basic ground rules:
First, the “original use” of the aircraft must start with the taxpayer — that is, it cannot be a used aircraft (other than certain sale/leaseback situations occurring within three months of the aircraft’s original use). However, if you are buying into a fractional program, such as Flexjet or NetJet, then the original use begins with the first user of each fractional interest in the aircraft, and each fractional owner will be considered the original user of his proportionate share.

Second, your binding written contract for the aircraft cannot have been signed prior to January 1, 2008. So if you are scheduled to have a new plane delivered in 2008 but signed the contract with the manufacturer in 2006 (as is probably the case), then you will not qualify for the bonus depreciation. The reason for this is that the bonus depreciation is intended to stimulate spending — and there is no economic stimulation if your decision to purchase was made two years ago with delivery occurring during 2008/2009. I know. Life isn’t fair.

But before you panic, let’s take a closer look at your situation. For example, are you sure you have a “binding written contract” for the aircraft as the IRS might define those words? In prior tax regulations, a contract is considered binding only if it’s enforceable under state law against the taxpayer or a predecessor and does not limit damages to a specified amount. Say an existing contract to purchase an aircraft has a liquidated damages provision of less than 5 percent — that might not be considered binding in the truest, IRSiest sense of the word and might still make you eligible for a bonus depreciation.

There are also other options to consider, such as “flips” and “swaps.” With a flip, instead of buying a new plane from the manufacturer, you find someone already scheduled to take possession of an aircraft during 2008/2009 who’s now having second thoughts, and buy your plane from him — potentially earning you your bonus.

Or if you have a preexisting binding written contract with delivery in 2008/2009, you might try to find another person in the new-aircraft delivery queue and do a swap — he buys your plane, you buy his plane and you both might be able to get bonuses.

A word of warning: With both flips and swaps, you had better make sure that the original use of the new aircraft starts with you and that the other party to the transaction is unrelated (again, as the IRS defines it) — then be prepared for quite a bit of scrutiny anyway. As you see, the new stimulus package may not be a guaranteed, slam-dunk, Christmas-in-April present, but it certainly encourages creative thinking and the desire to purchase new aircraft already scheduled to be built. 

Gary I. Horowitz, Esq., is special counsel with the Washington, D.C., law firm Wiley Rein LLP, specializing in aircraft transactions and tax planning. He can be reached at 202-719-7413 or ghorowitz@wileyrein.com.

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