Does leasing commercial aircraft engines as a trade or business to airlines impact the application of bonus depreciation rules under Section 168(k)?
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Leasing commercial aircraft engines as a trade or business to airlines does not, by itself, disqualify the property from bonus depreciation under Section 168(k), provided certain requirements are met. The application of bonus depreciation to leased property, including commercial aircraft engines, depends on several key factors:
1. General Eligibility for Bonus Depreciation
Under Section 168(k), bonus depreciation is available for "qualified property," which includes MACRS property with a recovery period of 20 years or less, provided the property is acquired and placed in service after the relevant effective date and meets the original use or used property acquisition requirements.
2. Leased Property and the "Original Use" or "Used Property" Rules
- Original Use: If the lessor (the engine leasing company) acquires new engines and leases them to airlines, the lessor is considered the original user, and the property is eligible for bonus depreciation, assuming all other requirements are met.
- Used Property: If the lessor acquires used engines, the property may still qualify for bonus depreciation if the lessor (or its predecessor) did not previously have a depreciable interest in the property, and the acquisition is not from a related party. The used property rules under Section 168(k) and the regulations are satisfied if the lessor did not previously use the property and the acquisition is by purchase from an unrelated party.
3. Leasing Activity and Trade or Business
Leasing property to others, including airlines, is considered a trade or business activity. The fact that the property is leased does not, by itself, disqualify it from bonus depreciation. The key is that the lessor is the taxpayer claiming depreciation and that the property is used in the lessor’s trade or business.
4. Special Rules and Exceptions
a. Required Use of ADS (Alternative Depreciation System)
Bonus depreciation is not available for property required to be depreciated under the ADS. Under Section 168(g), property must be depreciated under ADS if it is:- Used predominantly outside the United States,- Tax-exempt use property,- Tax-exempt bond-financed property,- Imported property subject to an executive order,- Property for which the taxpayer elects ADS,- Certain other specified property.
If the leased aircraft engines are used predominantly outside the United States, or if the lessee is a tax-exempt entity and the lease is a "disqualified lease" (as defined in Section 168(h)), the property may be required to use ADS and thus would not be eligible for bonus depreciation.
b. Related Party Transactions
If the lessor acquires the engines from a related party, the property is not eligible for bonus depreciation.
c. Sale-Leaseback and Syndication Transactions
Special rules apply to sale-leaseback and syndication transactions. If the lessor acquires new property, leases it to an airline, and then sells it within three months to another party who continues to lease it to the same airline, the purchaser in the last sale may be treated as the original user for bonus depreciation purposes.
5. Examples from Regulations
- Example: A financial institution buys new equipment and leases it to a lessee in a trade or business not described in Section 163(j)(7)(A)(iv) (i.e., not a utility or similar excluded business). The financial institution is eligible for bonus depreciation on the equipment, even though it is leased, provided all other requirements are met.
6. Conclusion
Leasing commercial aircraft engines to airlines does not, by itself, prevent the lessor from claiming bonus depreciation under Section 168(k). The lessor may claim bonus depreciation if:- The engines are MACRS property with a recovery period of 20 years or less,- The lessor is the original user or meets the used property rules,- The property is not required to be depreciated under ADS (e.g., not used predominantly outside the U.S., not tax-exempt use property in a disqualified lease, etc.),- The property is not acquired from a related party,- All other requirements of Section 168(k) and the regulations are satisfied.
If any of the exceptions apply (such as required use of ADS), bonus depreciation would not be available.
In summary: Leasing commercial aircraft engines to airlines is generally compatible with bonus depreciation, provided the property and transaction meet all statutory and regulatory requirements. The key issues to review are the use of ADS, related party rules, and the original use/used property requirements.
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