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Tax Reform Makes Pre-Owned Aircraft A Great Choice

From our Friends at Advocate Consulting Legal Group

Our government loves using the tax code to shape business’s economic activity. In 2008, Congress sought to boost the aircraft industry (one of the remaining areas of US-manufacturing dominance) with a temporary tax incentive known as “bonus depreciation.” In its original form, bonus depreciation gave a 50% accelerated first-year depreciation write-off for qualifying buyers of factory-new equipment (with some aircraft-specific enhancements).

While boosting manufacturers is a noble goal, the recent tax reform is more broad-based. The 2017 Tax Cuts and Jobs Act changes the bonus depreciation rule in two key ways: (1) it is no longer restricted to new equipment, thus placing pre-owned aircraft on equal footing with factory new; and (2) it elevates the write-off from 50% to 100%.

In other words, for the first time in almost a decade, the tax code is no longer biased to favor new over pre-owned. In order to understand why this is a game-changer for the aircraft buyer, consider how pre-owned vs. new aircraft values have diverged in the decade of new-equipment tax incentives—a distortion that is unprecedented, unlikely to repeat, and in some measure likely temporary. The following graphs depict the current prices, by model year, of four different models of aircraft, ranging from large cabin to small piston.

Aircraft Depreciation

Aircraft Depreciation

The data for these graphs comes from the fourth-quarter 2017 Vref Aircraft Value Reference, an industry standard tool. These four models represent current trends, and are not aberrations. Today’s marketplace assigns a price premium to new aircraft, giving buyers the opportunity for massive savings, simply by considering ones that are a few years old. Indeed, rising prices for certain pre-owned aircraft becomes a definite possibility in the current tax environment.

The new tax environment produces tailwinds for market activity and values of pre-owned aircraft, especially younger serial numbers of more popular models. The brokers and dealers of the National Aircraft Resale Association (NARA) can be expected to play a key role in this evolving marketplace.
The new law calls for 100% bonus depreciation to expire in 2022, but with politics as unpredictable as they are the law could be pared back. That may make 2018 the ideal year to consider a pre-owned purchase.

January 4, 2018
Jonathan Levy, Esq.
Florida Bar Certified Expert in Aviation Law
Partner, Advocate Consulting Legal Group, PLLC

Advocate Consulting Legal Group, PLLC is a law firm whose practice is limited to serving the needs of aircraft owners and operators relating to issues of income tax, sales tax, federal aviation regulations, and other related organizational and operational issues.