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Aviation Tax Planning in 2021

As we find ourselves in the first quarter of 2021, many private companies and individuals operating general aviation aircraft, or considering adding general aviation aircraft to our business operations, find ourselves uncertain regarding the year ahead. With clear political change in Washington, coupled with fewer conferences and face-to-face meetings, the uncertainty of 2020 maintains a cloud over early 2021 planning. It is essential to remember that general aviation aircraft continue to serve a vital role in growing and maintaining business operations in challenging times, and may provide a new and unprecedented public health benefit. Thoughtful planning now may help assure that your business is well positioned for a strong year end and outlook beyond.

1. Current Tax Law Maintains Powerful Purchase Incentives for Aircraft in 2021

Tax reform is a strong possibility in the months and years ahead, as we witness a new administration and Congress in Washington. However, it is important to realize that as of January 2021, the provisions of the Tax Cuts and Jobs Act of 2017 continue to govern business aircraft transactions. The TCJA provides that aircraft purchases made in 2021 and 2022 are eligible for 100% bonus depreciation, allowing qualified businesses to deduct 100% of the aircraft purchase price in the year of purchase.

Final regulations clarifying eligibility were issued in September, 2020. While new tax policy could seek to eliminate this incentive, it is unlikely to be passed as a first priority, given the need for continued stimulus, and unlikely to apply retroactively to purchases made before reform passes. This makes 2021 potentially a uniquely urgent time to identify and purchase the aircraft that meets the needs of your business.

2. The Lack of 1031 Exchanges for Aircraft Increases the Value of Utilizing Bonus Depreciation

The value of 100% bonus depreciation is particularly acute for those businesses currently holding an aircraft that they intend to sell and replace with another business aircraft. Why? When a business sells an aircraft that has been depreciated, this creates an ordinary income event requiring the recapture of any depreciation beyond the actual loss in value. Before the TCJA, 1031 exchanges could be used to delay the triggering of recapture, provided that a business was investing in a replacement aircraft close in time to the sale. Unfortunately, the TCJA eliminated the 1031 exchange. The 1031 exchange provisions were commonly used to avoid depreciation recapture for business aircraft owners planning to upgrade their aircraft while disposing of an aircraft. The impact of the loss of the 1031 exchange to avoid depreciation recapture has been blunted by the availability of bonus depreciation on the new replacement aircraft, allowing the income triggered by the sale of the prior aircraft to be fully offset by depreciation. However, once bonus depreciation is eliminated or reduced, the decision to transition between business aircraft could trigger significant tax bills. Additionally, an increase in the tax rate on business income may further burden the disposition.

3. Demand for General Aviation is Likely to See a Sharp Increase as Operations Resume

One of the most significant trend lines in general aviation in 2020 was the entrant of new businesses and individuals into general aviation travel as commercial travel became riskier and routes were cut. While the availability of a vaccine provides significant hope of a return to increase business operations, business operations have experienced a new awakening to the threat that can be posed by virus transmission. General aviation flying will remain the safer health option for many, driving demand and utility. 2020 also saw a significant contraction of commercial routes available, and the impact of this contraction will continue well into the years ahead. As we have witnessed in business cycles in the past, commercial air carriers are unable to quickly respond, especially in smaller markets. This lag means that business operations serving smaller markets, or with facilities in smaller markets, may need increased support from general aviation. Additionally, travel between large markets has become less convenient with fewer routes available and uncertain testing requirements varying by carrier.

4. Tax Planning Can Provide More Certainty in the Climate Ahead While future tax policy is a guessing game at the moment, it is reasonable to believe that many businesses and business owners may see their overall rates increase, increasing the value of deductions as well as the importance of effective planning. This reality, coupled with the known value of using general aviation to grow and maintain operations of healthy businesses, makes 2021 a great year to explore how your business aviation needs are being met and if you are properly structured to maximize that utility. By working with a well-versed aviation tax expert, you can capitalize on the opportunities available as you plan for the future.

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