Aircraft depreciation tax laws change extensively from one year to the next. Therefore, it is always advisable and prudent to consult with an attorney that specializes in aviation law and aircraft depreciation. It is possible for your aviation attorney to help you write-off most of the purchase price and use of your business aircraft the year of purchase. This is beneficial if you need to offset major gains by your company that year. If your company does not need to offset huge gains, a more traditional method of depreciation can provide more moderate tax relief and extend the depreciation to other years where your gains may be expected to be more substantial.
The ever-changing complexity of tax laws that apply to business aircraft have created a multitude of intricate tax benefits available to business and corporate entities that use aircraft for private corporate use. An aircraft, as a tangible fixed asset of a corporation, offers many years of tax benefits and use.
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Tangible fixed asset depreciation or wear and tear is calculated over the expected useful life of the asset. Its depreciation is determined by the estimated steady decrease in value while the asset is in use by the company or corporate entity. Aircraft components depreciate at different rates and the depreciation is affected by continued maintenance and frequency of overhaul. Each component of an aircraft has a different depreciation rate because wear and tear and consequently the useful life expectancy of each differ from the rest. In other words, aircraft depreciation is dissected by the longevity of each of its parts rather than by the total value of the asset.
Customary depreciation of aircraft components consist of:
- The mechanical structure of an aircraft or Airframe - Cost depreciates based on an estimate of 25-years of useful-life expectancy, capitalized maintenance allowance for wear and tear over the period leading up to the next overhaul.
- Aircraft engines - Cost depreciates based on an estimate of 10-years of useful-life expectancy, capitalized maintenance allowance for wear and tear over the period leading up to the next overhaul.
- Aircraft spare parts - Cost depreciates based on an estimate of 10-years of useful-life expectancy.
- Undercarriage or landing gear - Cost depreciates based on an estimate of 7-years of useful-life expectancy, capitalized maintenance allowance for wear and tear over the period leading up to the next overhaul.
You have to keep in mind declared depreciation of your aircraft on past tax returns when calculating how much depreciation to claim on your taxes every year. This is essential because you have to reduce the wear and tear value from your basis (the original purchase cost of the aircraft). Your basis is reduced every time you file a claim against it on your tax returns until there is nothing left. If you sell your aircraft, you will have to reduce the basis from the selling price and claim the excess as a capital gain for tax purposes.
The three rules the IRS uses to consider the depreciation of a business aircraft include:
- Personal, trade, or business use of the aircraft
- Appropriate and essential for the operation of the business
- Passive loss due to rental, LLC, or other passive ventures of the investor (passive loss can only be claimed against passive income)
Do you need the experience and expertise an Aviation Attorney can provide in the field of Aircraft Depreciation? Contact an Aviation Attorney that can provide answers to your Aircraft Depreciation question today!
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