The opposite is actually true, the balance sheet looks best when it reveals a healthy and profitable company. You’ll see many testimonies from successful business owners that have used aircraft as a tool to grow their business.

When you look at the fact that you can use that money that would have gone to the IRS as a downpayment to purchase the asset, you are actually improving your ratio of assets and liabilities.

I’m a huge proponent of being debt free and growing a business debt free, I was completely debt free for roughly twenty years, built Jet Acquisitions debt free from scratch, other than some personal loans from friends to get through a few tight times early on. That’s really not as impressive as it sounds, Jet Acq is a service company and it didn’t require huge amounts of capital for equipment, personnel or inventory.

I’m also part of another company that is staged for rapid growth, it was clear we could not build that company without debt, so I departed the debt free mentality and now have lines of credit, loans on company vehicles and financed equipment. In a conventional business it’s probably going to require debt in the form of loans, lines of credit or investors. I prefer to deal with the bank over an investor.

If you are using debt as a tool to build your business, it’s pretty hard to beat purchasing a multi-million dollar asset that can be written off, facilitate business (and pleasure) all while increasing your borrowing power. I’m not quite at the airplane level yet, but that is the next step.

We have clients who buy aircraft and place them on lease or charter, then after establishing a track record, they trade for a more expensive aircraft or add an aircraft. The idea of borrowing millions of dollars scares the heck out of me, so I’m not saying this is a good plan, just that it’s one way to grow a business.

I’ve learned a lot from watching our clients, I’m not that smart, so I’ll watch what the smart people do and do that. It looks to me like smart people are buying assets and taking the depreciation.

How so? You own the asset 100% so its value appears on your balance sheet as a positive.

You would rather pay taxes on profits you aren't going to make?

Mike C.

Andrew,
The airplane would still be on the balance sheet.

The depreciation expense would be on the P&L. Generally, the offset for depreciation goes into an “accumulated depreciation” account, so the airplane value wouldn’t necessarily be reduced, but you do have a point about it subtracting the overall assets.

The aircraft depreciated value and the market value are two very different things.

My airplane's depreciated value: $0 (100% bonus depreciated)

My airplane's market value: $1.5M (give or take)

Mike C.

Well, so much for filling out my taxes on a 5x7 card.



You remember hearing that, no?

The aircraft depreciated value and the market value are two very different things.

My airplane's depreciated value: $0 (100% bonus depreciated)

My airplane's market value: $1.5M (give or take)

Mike C.

So you’re carrying at least 1.5M liability on your books is what he’s saying

You will have to see that gain in future

It’s normal for a company general ledger and balance sheet to differ from its tax return. Just because you took the tax deduction doesn’t mean the balance sheet your bank considers has that asset with zero value. There is always a schedule of book to tax variations.

It is easy. Write down how much you made, send it all in. Done.

Mike C.

Sorry for my poor communication.

Thats what I was talking about. I show the plane on the balance sheet and the accumulated depreciation for the plane under that. I don’t group it into a standard bucket like office furniture etc. I do the same with real estate.

My point was that 100% deprecation drops the total asset value and this will have an impact in certain circumstances.

Don’t get me wrong, if I could claim 100% I would be!

Andrew

You mean this one?
(EDIT: I see Mike C beat me to the punch!)

I sell businesses and raise capital for a living, and I've never run into a situation where a fully depreciated asset (on paper) affected the outcome in any way. Lenders, buyers, and investors will typically be most interested in the FMV of assets.

Now, you will have to report the gain on sale for the recapture in the event the basis is stepped up or the asset is sold for more than the value on the balance sheet.

If it's fully depreciated then the basis will be zero, the gain will be 100% of the sale price, that's a liability to track

Correct.

But you got 100% benefit from that in more valuable past dollars when your bonus depreciation took it all off your taxes.

You will then pay for your capital gains on future lesser value dollars. Plus, you had more money in your pocket to invest during that period and thus came out way ahead.

Any undepreciated basis you carry forward is losing value as time goes by. Carrying it is ALWAYS worse than not on total economic impact.

Mike C.

Just read this in today's WSJ

IRS Auditors Target Personal Use of Corporate Jets

I imagine the article is behind paywall - sorry about that but I imagine most folks impacting by this are subscribers

https://www.wsj.com/personal-finance/ta ... lead_pos10