Are there special bonus depreciation rules that apply to aircraft purchases?
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Yes, there are special bonus depreciation rules that apply to aircraft purchases under the Internal Revenue Code, and these rules have evolved over time, including recent changes under the One Big Beautiful Bill Act (OBBBA) and prior law. The treatment of aircraft for bonus depreciation purposes is subject to both general and specific requirements, and certain aircraft may qualify for more favorable treatment than other types of property. Below is a comprehensive explanation of the relevant legal details, including the nuances and caveats that apply to aircraft purchases.
1. General Bonus Depreciation Rules (IRC §168(k))
- Bonus depreciation allows taxpayers to deduct a significant percentage (up to 100% in some years) of the cost of qualifying property, including certain aircraft, in the year the property is placed in service.
- To qualify, the property must generally:
- Be new or used property (if not previously used by the taxpayer),
- Have a recovery period of 20 years or less under MACRS,
- Be acquired and placed in service within the applicable timeframes,
- Not be required to be depreciated under the Alternative Depreciation System (ADS) (e.g., listed property used 50% or less for business, property used predominantly outside the U.S., etc.).
2. Special Rules for Aircraft (Transportation Property and Certain Aircraft)
A. One-Year Delay in Phase-Down for Certain Aircraft
- Transportation Property (including aircraft used in the trade or business of transporting persons or property) and Certain Aircraft (generally, business aircraft not used in commercial transportation) are subject to a one-year delay in the phase-down of bonus depreciation rates.
- For example, while most property saw bonus depreciation rates drop to 80% in 2023, qualifying aircraft could still receive 100% bonus depreciation if placed in service in 2023, with the phase-down beginning in 2024.
Requirements for the One-Year Delay:
- Transportation Property:
- Must be used in the trade or business of transporting persons or property.
- Must have an estimated production period exceeding one year and a cost exceeding $1 million.
- Certain Aircraft (not transportation property):
- Must be acquired by the taxpayer (or under a binding contract) before January 1, 2027.
- At the time of contract, a nonrefundable deposit of at least the lesser of 10% of the cost or $100,000 must be made.
- Must have an estimated production period exceeding four months and a cost exceeding $200,000.
Bonus Depreciation Rates for Aircraft:
- For qualifying aircraft, the bonus depreciation rates are:
- 100% for property placed in service in 2023 (while other property is at 80%)
- 80% in 2024
- 60% in 2025
- 40% in 2026
- 20% in 2027 (if acquired under a binding contract before January 1, 2027)
- 0% thereafter.
Recent Law Changes (OBBBA, 2025):
- The OBBBA made 100% bonus depreciation permanent for qualified property, including certain aircraft, for property acquired after January 19, 2025.
- For property acquired under a binding contract before January 20, 2025, the original phase-out schedule applies (i.e., 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027 and after).
3. Predominant Use Test and Recapture (IRC §280F)
- To qualify for bonus depreciation, the aircraft must be used more than 50% for "qualified business use" in the year it is placed in service.
- If the aircraft fails to meet the predominant use test in a subsequent year during the recovery period, the taxpayer must recapture the excess depreciation (i.e., the difference between the accelerated depreciation taken and what would have been allowed under straight-line depreciation), and switch to straight-line depreciation for the remainder of the recovery period.
4. Listed Property and Enhanced Substantiation (IRC §274(d))
- Aircraft are considered "listed property" under IRC §280F and are subject to strict substantiation requirements.
- Taxpayers must maintain detailed records for each flight, including:
- Date, origin, destination, flight time, pilot, passenger manifest, purpose of flight, and allocation between business, personal, entertainment, and commuting use.
- Failure to maintain adequate records may result in the IRS treating flights as personal/entertainment, leading to income inclusion for users and disallowance of deductions for the business.
5. Deduction Disallowance for Entertainment and Commuting (IRC §274(a), §274(l))
- Expenses attributable to entertainment use or commuting are not deductible, even if the aircraft is otherwise used for business.
- The costs of operating the aircraft must be allocated between business, entertainment, and commuting flights, and only the business portion is deductible.
6. Other Key Considerations
- Imputed Income: Personal use of a business aircraft by employees, officers, or related parties generally results in imputed income to the user, calculated using either the fair market value (charter rate) or the Standard Industry Fare Level (SIFL) method.
- Passive Activity and Hobby Loss Rules: If the aircraft is leased (especially under a "dry lease"), the activity may be considered passive, limiting the deductibility of losses. Hobby loss rules may also apply if the activity is not engaged in for profit.
- Excise Tax: Air transportation excise taxes may apply to certain flights, especially if the aircraft is chartered or leased to others.
7. Summary Table of Key Requirements for Aircraft Bonus Depreciation
8. Recent IRS Enforcement Focus
- The IRS has announced increased scrutiny and audit activity regarding business aircraft, with a focus on substantiation, allocation between business and personal use, and compliance with all relevant Code sections.
9. Conclusion
Special bonus depreciation rules do apply to aircraft purchases. These rules provide for a one-year delay in the phase-down of bonus depreciation for certain aircraft, subject to specific requirements regarding use, production period, cost, and acquisition timing. Aircraft must meet the predominant business use test to qualify, and strict substantiation is required. The IRS is actively auditing this area, so compliance and documentation are critical.
If you have a specific scenario or aircraft in mind, additional details may be needed to determine eligibility and compliance with these rules.
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