When it went into effect on January 1, 2018, the Tax Cuts and Jobs Act of 2017 made the most significant changes to business tax law in more than three decades.
While there are wide-ranging ramifications of these changes across all businesses, including permanently reducing the corporate tax rate from 35% to 21%, there are several aspects of the new code that specifically impact aircraft acquisition and finance transactions.
It is important that all companies that are considering acquiring corporate aircraft fully understand the impact of the new tax code so that they can make the right decisions and take full advantage of all the deductions available.
Here are three equipment related areas affected by the law and how they may impact your company.
1. Bonus Depreciation
Under the new tax law, companies can now write off, as an expense, the full cost of capital assets in the year in which they are acquired. This applies to both new and used equipment. This write off, known as “Bonus Depreciation", is a significant advantage for companies over the prior tax law, which required companies to depreciate capital assets using the modified accelerated cost recovery system (“MACRS").
Whether a company acquires equipment through a lease or loan, Bonus Depreciation should help make the transaction more affordable.
It is important to note that the reduction in Federal Corporate Tax Rate, from 35% to 21%, reduces the impact of all tax benefits.
While Bonus Depreciation will have an impact on a company's tax position, it is somewhat offset by the reduced tax rate.
The Bonus Depreciation amount phases out for most equipment by 20% per year each year beginning in 2023. Corporations that previously had a seven-year recovery period for depreciation will see that drop to five years for qualifying aircraft placed in service after December 31, 2017 1.
2. Interest Deductions
The new tax law places limitations on the amount of interest companies can deduct. If a company has annual revenue over $25 million, it may only deduct qualifying interest expenses up to 30% of “Adjusted Taxable Income." “Adjusted Taxable Income" is defined as taxable income, less depreciation, amortization, interest expense and interest income2.
If a company finds itself in a situation where interest deductions are limited, leasing becomes a significantly more appealing way to acquire aircraft, since the entire lease payment is tax deductible and not subject to this limitation.
3. Section 179
Under Section 179 of the tax code, companies that purchase an aircraft and put it into service can deduct the cost of the aircraft immediately within certain thresholds.
Traditionally, companies with up to $2 million in equipment investment could write off up to $500,000 in those purchases. After that, the deduction declined by one dollar for every purchase dollar that exceeded the total investment allowance.
The tax law changed the purchase threshold, bumping up the investment threshold to $2.5 million before the phase-out begins, and allowing companies to deduct up to $1 million of purchases up to that threshold if they have the taxable income to do so 2.
The advent of Bonus Depreciation available to all companies for new and used equipment (noted above) reduces the relevance of Section 179, since there is no longer a restriction on company size in order to fully expense an equipment acquisition in the year acquired.
Will The New Tax Law Impact Your Aircraft Investments?
Much of the industry is still wading through the changes and determining what it means for customers and aircraft leasing and finance providers.
The new tax law holds potential benefits for companies, but also requires careful examination. Decisions about leasing versus other forms of financing equipment now demands more thorough examination of multiple factors, such as taxable income levels, total interest expense, deduction thresholds, among others.
In addition, state tax laws may differ from the federal law, which may add another layer of complexity.
As the IRS continues to release guidance regarding the new tax law, it is critical for companies to work with a skilled tax professional to ensure they are making the best decisions for their situations 3.
Does the New Tax Law Affect Your Aircraft Acquisition?
Learn how the new tax law could affect your company's aircraft investment by connecting with a PNC Aviation Finance representative.
