Do aircraft qualify for special treatment under bonus depreciation rules?
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Yes, aircraft can qualify for special treatment under the bonus depreciation rules, but there are important legal requirements, limitations, and substantiation obligations that must be satisfied for a taxpayer to claim bonus depreciation on an aircraft. Below is a comprehensive analysis of the relevant legal framework, including the nuances and caveats that apply to business aircraft under the Internal Revenue Code, Treasury Regulations, and recent IRS enforcement initiatives.
1. Bonus Depreciation for Aircraft: General Rule
Bonus depreciation allows taxpayers to deduct a significant portion (up to 100% in some years) of the cost of qualifying property, including certain aircraft, in the year the property is placed in service. The rules for bonus depreciation are set out in IRC §168(k).
Qualified Property
To be eligible for bonus depreciation, the aircraft must be "qualified property," which generally means:- The property has a recovery period of 20 years or less under MACRS,- The original use of the property begins with the taxpayer, or the property is acquired in a qualifying manner (including certain used property),- The property is placed in service within the applicable time window, and- The property is not required to be depreciated under the Alternative Depreciation System (ADS) (see below for exceptions).
Aircraft are specifically included as "transportation property" and, if used in a trade or business, generally have a MACRS recovery period of 5 or 7 years, making them eligible for bonus depreciation if other requirements are met.
Applicable Bonus Depreciation Percentage
- For property acquired and placed in service after January 19, 2025, the bonus depreciation rate is 100% (permanent under the One Big Beautiful Bill Act, OBBBA).
- For property acquired before January 20, 2025, and placed in service in 2025, the rate is 40% (or 60% for certain long-production-period property and certain aircraft).
2. Special Rules for Aircraft (Listed Property and Predominant Use Test)
Aircraft are classified as "listed property" under IRC §280F. This means they are subject to heightened substantiation and use requirements:
Predominant Use Test (Qualified Business Use)
- To claim bonus depreciation, the aircraft must be "predominantly used in a qualified business use" in the year it is placed in service, meaning more than 50% of its use must be for qualified business purposes.
- "Qualified business use" is defined as any use in a trade or business, but with important exceptions for use by 5% owners or related persons (see below).
Special Rule for Aircraft (25% Test)
- For aircraft, certain uses by 5% owners or related persons (such as leasing to a related party or use as compensation) are excluded from qualified business use unless at least 25% of the total use of the aircraft during the year is qualified business use other than those types of use. If the 25% threshold is met, all trade or business use is counted.
Recapture
- If the aircraft fails the predominant use test in a subsequent year during the recovery period, the taxpayer must recapture the excess depreciation (the difference between the accelerated depreciation taken and what would have been allowed under straight-line ADS) as ordinary income, and switch to straight-line depreciation for the remainder of the recovery period.
3. Substantiation and Documentation Requirements
Because aircraft are listed property, IRC §274(d) and Treas. Reg. §1.274-5 require strict substantiation:- Taxpayers must maintain contemporaneous records, including flight logs, showing for each flight: date, origin, destination, purpose, passengers, and allocation between business and personal use.- The IRS expects supporting documentation such as calendars, emails, and itineraries to corroborate the business purpose of each flight and passenger.
Failure to maintain adequate records can result in the IRS reclassifying flights as personal or entertainment, leading to loss of deductions, income inclusion for personal use, and possible penalties.
4. Personal Use, Entertainment, and Deduction Disallowance
- Personal use of a business aircraft by employees, owners, or related persons is a taxable fringe benefit, and the value must be included in the individual's income (generally using the SIFL or charter rate method).
- Expenses allocable to entertainment or commuting flights are generally not deductible under IRC §274(a) and §274(l), even if the value is included in the employee’s income.
- The IRS requires allocation of all aircraft expenses (including depreciation) to each flight and passenger, using one of several approved methods (occupied seat hours/miles or flight-by-flight hours/miles).
5. Special Considerations for Leased or Rented Aircraft
- If an aircraft is leased to another party, the passive activity loss rules under IRC §469 may apply, especially for "dry leases" (without crew), which are generally considered passive activities unless the taxpayer materially participates.
- Hobby loss rules under IRC §183 may also apply if the activity is not engaged in for profit.
6. IRS Enforcement and Audit Focus
- The IRS has announced a specific enforcement campaign targeting business aircraft, with a focus on substantiation of business versus personal use, proper income inclusion for personal use, and compliance with bonus depreciation rules.
- Audits will scrutinize flight logs, allocation methods, and supporting documentation, and may result in reclassification of flights, disallowance of deductions, and recapture of bonus depreciation.
7. Summary of Key Requirements for Bonus Depreciation on Aircraft
To claim bonus depreciation on an aircraft:1. The aircraft must be "qualified property" (generally, new or qualifying used property with a MACRS recovery period of 20 years or less, placed in service in the appropriate time window).2. The aircraft must be used more than 50% for qualified business use in the year placed in service, with special rules for use by 5% owners or related persons (25% threshold).3. The taxpayer must maintain detailed, contemporaneous records substantiating the business use of the aircraft.4. Expenses must be properly allocated between business, personal, entertainment, and commuting use, and deductions for entertainment and commuting use are disallowed.5. If the aircraft fails the predominant use test in a later year, recapture of excess depreciation is required.
8. Caveats and Exceptions
- If the aircraft is required to be depreciated under ADS (e.g., if used predominantly outside the U.S., or fails the business use test), it is not eligible for bonus depreciation.
- Special rules apply to aircraft used for leasing, entertainment, or by related parties, and to self-constructed or custom aircraft (timing of acquisition and placed-in-service dates are critical).
In summary: Aircraft can qualify for special treatment under the bonus depreciation rules if they are used predominantly for qualified business purposes, the taxpayer maintains strict substantiation, and all other requirements of IRC §168(k) and §280F are met. The IRS is actively auditing these issues, and failure to comply with the substantiation and use requirements can result in loss of deductions, recapture of bonus depreciation, and other adverse tax consequences.
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