How do the international and domestic use of aircraft engines influence their eligibility for bonus depreciation versus ADS under Section 168(g)?
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The eligibility of aircraft engines for bonus depreciation versus the requirement to use the Alternative Depreciation System (ADS) under Section 168(g) depends on whether the property is used predominantly within or outside the United States, as well as the specific type of aircraft and its use.
1. General Rule for Bonus Depreciation
Bonus depreciation under Section 168(k) allows for immediate expensing of 100% of the cost of qualified property, including aircraft engines, provided the property:- Has a recovery period of 20 years or less,- Is not required to be depreciated under ADS,- Is not otherwise excluded (e.g., used property with prior related-party use, property acquired from a related party, etc.).
2. Requirement to Use ADS for Certain Property
Section 168(g) requires the use of ADS (straight-line depreciation over a longer recovery period) for certain property, including:- Tangible property used predominantly outside the United States during the taxable year,- Tax-exempt use property,- Tax-exempt bond financed property,- Imported property covered by an Executive order,- Property for which the taxpayer elects ADS,- Certain other specified property.
3. Special Rules for Aircraft and Aircraft Engines
A. Aircraft Used Predominantly Outside the United States
- General Rule: If an aircraft engine is used predominantly outside the United States, it is subject to ADS and is not eligible for bonus depreciation.
- Exception: Section 168(g)(4)(A) provides an exception for aircraft registered with the FAA and operated to and from the United States or under contract with the United States. Such aircraft (and their engines) are not required to use ADS solely because of international use.
B. Aircraft Used Predominantly Within the United States
- If the aircraft engine is used predominantly within the United States, it is not subject to ADS on that basis and may be eligible for bonus depreciation, provided all other requirements are met.
C. Determining Predominant Use
- The determination of whether property is used predominantly outside the United States is made under the test in Treas. Reg. § 1.48-1(g)(1)(i), which generally looks at the percentage of time or use outside the U.S. during the taxable year.
4. Depreciation Method and Recovery Period under ADS
- If ADS applies, the aircraft engine must be depreciated using the straight-line method over the class life (typically 6 years for aircraft engines not used in commercial or contract carrying of passengers or freight, or 12 years for those used in commercial air transport, depending on the asset class).
5. Bonus Depreciation Ineligibility under ADS
- Property required to be depreciated under ADS is specifically excluded from bonus depreciation eligibility under Section 168(k)(2)(D).
6. Summary Table of Scenarios
7. Practical Application
- Domestic Use: Aircraft engines used mainly in the U.S. (or meeting the FAA-registered exception) can use MACRS and are eligible for bonus depreciation.
- International Use: Aircraft engines used mainly outside the U.S. (and not meeting the FAA-registered exception) must use ADS and are not eligible for bonus depreciation.
In summary: Aircraft engines used predominantly outside the United States are generally required to use ADS and are not eligible for bonus depreciation, unless they are FAA-registered and operated to and from the U.S. or under contract with the U.S., in which case they may use MACRS and qualify for bonus depreciation if other requirements are met.
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