BeechTalk - BT

Username Protected · **Posted:** 13 Jan 2021, 14:29

The short answer is yes, there's a sunset clause, but for the purposes of my question I'm referring to prematurely.

We saw panic from purchasers starting in November, companies that had planned to close and take advantage of Bonus Depreciation in 2021 suddenly decided to accelerate closings to make sure they were able to claim it in 2020 because of fear of losing Bonus Depreciation (immediate expensing).

So, now I wonder if this trend will continue, will buyers adopt the reasoning that they should buy an aircraft and put it in service NOW before any laws can be changed?

For the tax experts on here, does it even work that way? If I buy an airplane and place it is service in June and they government repeals the tax plan in July did I slide in under the wire?

Username Protected · **Posted:** 13 Jan 2021, 14:31

Not a tax expert, but realistically, doubt that there will be any changes to tax treatment in 2021. Going forward, who knows, but this year, would bet against it.

Chip, I don't believe that they can change the laws/rules in any given year that would have an adverse impact for that same calendar year. It is usually prospective.

Also, not sure that bonus depreciation is a great reason to spend any where from the high hundreds of thousands, to millions, to many millions on an airplane. Do tax treatments like bonus depreciation pull purchases forward? For sure. Can they push the scale away from buying on the used market, to buying on the new market? Potentially. Do they stimulate purchases that would otherwise not be made, but for the tax treatment? Not so sure. And if they do, more unsure of the financial wisdom. And unless you are constantly upgrading, eventually the bonus depreciation comes home to roost in terms of capital gains on the remaining tax book value (vs GAAPP book value) of the asset.

Like a lot of tax laws, it creates distortions that will eventually iron out.

Username Protected · **Posted:** 13 Jan 2021, 15:15

Username Protected wrote:

Not a tax expert, but realistically, doubt that there will be any changes to tax treatment in 2021. Going forward, who knows, but this year, would bet against it.

Chip, I don't believe that they can change the laws/rules in any given year that would have an adverse impact for that same calendar year. It is usually prospective.

Also, not sure that bonus depreciation is a great reason to spend any where from the high hundreds of thousands, to millions, to many millions on an airplane. Do tax treatments like bonus depreciation pull purchases forward? For sure. Can they push the scale away from buying on the used market, to buying on the market? Potentially. Do then stimulate purchases that would otherwise not be made, but for the tax treatment? Not so sure. And if they do, more unsure of the financial wisdom. And unless you are constantly upgrading, eventually the bonus depreciation comes home to roost in terms of capital gains on the remaining tax book value (vs GAAPP book value) of the asset.

Like a lot of tax laws, it creates distortions that will eventually iron out.

We see multiple purchases every year because of bonus depreciation and made some moves this past quarter that I would have recommended against, but our clients were motivated by the huge tax incentives.

Capital gains is only an issue if you sell the aircraft without replacing it right?

Username Protected · **Posted:** 13 Jan 2021, 15:24

Username Protected wrote:

We see multiple purchases every year because of bonus depreciation and made some moves this past quarter that I would have recommended against, but our clients were motivated by the huge tax incentives.

Capital gains is only an issue if you sell the aircraft without replacing it right?

Issue with accelerated tax depreciation is two-fold. First, it pulls all the depreciation forward, so that there is no depreciation expense, or substantially reduced depreciation expense, in the out years. Of course from a pure time value of money perspective, that is a tax paying benefit.

Second, if you sell the airplane, the entire amount over the depreciated value becomes taxable income. May or may not be an issue depending upon how many years the asset is held. Also, to your point, if you replace it with a plane of greater or equal value to the un-accelerated remainder of the value, then you have kicked the tax can down the road.

For people in businesses that require capital expenditures, I think that the bonus depreciation is less of an issue. For us, we can spend $$ on machinery & equipment and get the same benefit or spend on aviation assets. For folks in service businesses, financial industry or any business that does not require a lot of capital investment, slightly different calculus.

But I am personally always a bit skeptical about spending money purely for tax reasons. Does not make sense. You still have to spend $$. Had you not spent the money, you would have a higher tax bill, but you would have more money left in your account.

On the margin does consideration of tax treatment make sense? Probably. But should it drive the decision to buy a plane? Not so sure...

Username Protected · **Posted:** 13 Jan 2021, 15:26

Any tax code changes made in 2021 will not take affect until 2022.

Username Protected · **Posted:** 13 Jan 2021, 16:02

Username Protected wrote:

Any tax code changes made in 2021 will not take affect until 2022.

Congress has made retroactive tax changes in the past, so this is not a guarantee.

Mike C.

Username Protected · **Posted:** 13 Jan 2021, 16:03

If you purchase an aircraft thru an LLC and use the depreciation against your ordinary income ,when you sell won't the proceeds be taxed as ordinary income and not as capital gains?

Phil

Username Protected · **Posted:** 13 Jan 2021, 16:08

Username Protected wrote:

If you purchase an aircraft thru an LLC and use the depreciation against your ordinary income ,when you sell won't the proceeds be taxed as ordinary income and not as capital gains?

Phil

Yes, you are correct, My mistake. I should have said taxable gain on the sale. In an operating business it would taxed as ordinary income.

Username Protected · **Posted:** 13 Jan 2021, 16:09

Username Protected wrote:

Fixed it for you - Under Section 179 if you sell the asset the recapture tax is at normal income rates - buy and 179 a 100K asset = tax asset value is 0. Sell for 110K = 100k normal rates 10k capital gain.

Issue with accelerated tax depreciation is two-fold. First, it pulls all the depreciation forward, so that there is no depreciation expense, or substantially reduced depreciation expense, in the out years. Of course from a pure time value of money perspective, that is a tax paying benefit.

Second, if you sell the airplane, the entire amount over the (original in service cost) becomes a capital gain. May or may not be an issue depending upon how many years the asset is held.
Also, to your point, if you replace it with a plane of greater or equal value to the un-accelerated remainder of the value, then you have kicked the tax can down the road.

For people in businesses that require capital expenditures, I think that the bonus depreciation is less of an issue. For us, we can spend $$ on machinery & equipment and get the same benefit or spend on aviation assets. For folks in service businesses, financial industry or any business that does not require a lot of capital investment, slightly different calculus.

But I am personally always a bit skeptical about spending money purely for tax reasons. Does not make sense. You still have to spend $$. Had you not spent the money, you would have a higher tax bill, but you would have more money left in your account.

On the margin does consideration of tax treatment make sense? Probably. But should it drive the decision to buy a plane? Not so sure...

Username Protected · **Posted:** 13 Jan 2021, 16:10

Username Protected wrote:

But I am personally always a bit skeptical about spending money purely for tax reasons. Does not make sense. You still have to spend $$. Had you not spent the money, you would have a higher tax bill, but you would have more money left in your account.

People go to great lengths to lower their taxes. Including spending money. A lot of it.
The fact that had they not spend it they would pay higher tax but still kept even more in the account seems to elude them.

On the other hand if you have to buy it anyway and the accelerated depreciation gives you a chance to upgrade your purchase... then go for it.

Username Protected · **Posted:** 13 Jan 2021, 17:08

Username Protected wrote:

People go to great lengths to lower their taxes. Including spending money. A lot of it.
The fact that had they not spend it they would pay higher tax but still kept even more in the account seems to elude them.

On the other hand if you have to buy it anyway and the accelerated depreciation gives you a chance to upgrade your purchase... then go for it.

I don't think it eludes them, I think they'd rather it go to something they want, rather than send it to their favorite Uncle in D.C.......

Username Protected · **Posted:** 13 Jan 2021, 18:17

Username Protected wrote:

But I am personally always a bit skeptical about spending money purely for tax reasons. Does not make sense. You still have to spend $$. Had you not spent the money, you would have a higher tax bill, but you would have more money left in your account.

It is obviously wrong to spend money solely to reduce your tax bill.

But what you can do is optimize your purchase to save you tax money.

Consider an airplane that has business and personal use as many do. If you buy that at the end of the year, *and* you fly it *only* for business purposes that year, then you can deduct 100% of the purchase price through bonus depreciation. In subsequent years, as long as you maintain at least 50% business use, that depreciation is NOT recaptured.

While you can do this if you bought in January, it means you have to fly 100% business the whole year. But if you fly it 50% personal that year, then you only get 50% bonus depreciation. That means half the airplane was bought with post tax money. Bummer.

But you could literally buy on Dec 31st, fly one business flight, and then you get 100% bonus depreciation. And yet, the very next day on Jan 1st, you can now use the plane up to 50% personally despite the plane being entirely bought with pre tax money.

This is why year end is such a hot time to buy.

So it isn't about spending money gratuitously to reduce taxes, it is about optimizing how and when you buy to maximize tax benefits.

Mike C.

Username Protected · **Posted:** 13 Jan 2021, 21:41

Username Protected wrote:

Any tax code changes made in 2021 will not take affect until 2022.

Congress has made retroactive tax changes in the past, so this is not a guarantee.

Mike C.

Username Protected · **Posted:** 14 Jan 2021, 10:36

When Bill Clinton raised taxes in 1993, the changes were made retroactive to the beginning of the year. While the constitution clearly prohibits ex post facto laws, the claim at the time was that since we were still in the same tax year there was no difference between dramatically increasing taxes for the remainder of the year vs. retroactively raising taxes, with the new "permanent rate". The difference of course was that people were denied the opportunity to change their behavior (in the first part of the year) in response to the tax changes. There is a very different environment in the Supreme Court these days, so it's possible that a challenge to retroactive tax increases might get a favorable ruling. Even so, I would guess that bonus depreciation opportunities will be reduced - until there is a recession, and congress wants "targeted investments".

I thought about "upgrading planes" last year, however with Covid and Zoom, my business travel has evaporated, and I'm not sure if it will ever again get to 50% of my flying time.

Username Protected · **Posted:** 14 Jan 2021, 11:08

There has been discussion about a series of tax changes likely in this Congress (and proposed by President-elect Biden during his campaign), which includes (among other things): 1) raising the top marginal rate back to 39.6% from the current 37%, 2) reinstating the full deduction for state and local taxes, 3) eliminating the lower capital gains rate (which would be a big change), 4) raiding the corporate tax rate several clicks but not back to where it was, and 5) lowering the estate tax exemption amount back to $5 mm from its current value of $11 mm.

If I’m not mistaken, Congress has the power to make these changes retroactive to Jan. 1, 2021 and in this current political climate, I would assume that’s exactly what they would do . I don’t recall if the bonus depreciation was part of that package or not... but I think those that purchased their planes at the end of 2020 were probably wise to do so if tax avoidance was important to them.

Remains to be seen but if I was betting money on it (and, in some sense, we all are), I would expect the tax increases to come and be effective for 2021, not 2022. If that turns out not to be the case, it would be a pleasant surprise. Because I don’t own aircraft for business purposes, most of this is irrelevant to me from an aircraft purchase/sale timing perspective but it’s obviously important to many people.

Just my two cents.

Is Bonus Depreciation Going Away?