What are the implications of selling an aircraft before the end of its tax depreciation period?
Ask Blue J any tax question, then go deeper. Follow up, add client-specific context, and explore the sources behind every answer with Blue J’s generative AI solution for tax research.
When a business sells an aircraft before the end of its tax depreciation (MACRS) recovery period, several important federal income tax consequences arise. These consequences involve depreciation recapture, gain or loss recognition, and potential impacts from prior bonus depreciation or Section 179 expensing. The implications are governed by the Internal Revenue Code, Treasury Regulations, and IRS guidance. Below is a comprehensive analysis:
1. Depreciation Recapture under Section 1245
- General Rule: Aircraft are generally classified as "section 1245 property" because they are tangible personal property subject to depreciation under section 167.
- Recapture Amount: Upon sale, the portion of gain equal to the lesser of (A) the recomputed basis (original cost plus all depreciation/amortization deductions allowed or allowable, including Section 179 and bonus depreciation), or (B) the amount realized (sale price), over the adjusted basis, is recaptured as ordinary income.
- Calculation:
- Recomputed Basis: Adjusted basis plus all depreciation/amortization deductions taken.
- Adjusted Basis: Original cost minus all depreciation/amortization deductions taken.
- Ordinary Income: The gain up to the amount of depreciation/amortization taken is taxed as ordinary income, not capital gain.
- Section 179 and Bonus Depreciation: Deductions under Section 179 and bonus depreciation are treated as depreciation for recapture purposes.
Example:If an aircraft was purchased for $5,000,000, $4,000,000 of depreciation (including Section 179 and bonus) was claimed, and it is sold for $3,000,000 when the adjusted basis is $1,000,000, then $3,000,000 (sale price) - $1,000,000 (adjusted basis) = $2,000,000 gain. The lesser of $4,000,000 (recomputed basis minus adjusted basis) or $2,000,000 (gain) is recaptured as ordinary income. Here, the full $2,000,000 gain is ordinary income.
2. Recognition of Gain or Loss
- Gain: If the sale price exceeds the adjusted basis, the gain is recognized. The portion up to the depreciation taken is ordinary income (as above); any excess is capital gain.
- Loss: If the sale price is less than the adjusted basis, a loss is recognized, generally as an ordinary loss if the aircraft was used in a trade or business.
3. Impact of Bonus Depreciation and Section 179
- Accelerated Deductions: If bonus depreciation or Section 179 was claimed, the adjusted basis will be lower, increasing the likelihood and amount of recapture as ordinary income.
- Recapture: All bonus depreciation and Section 179 deductions are subject to recapture as ordinary income upon sale.
4. Depreciation Deductions in Year of Sale
- Partial Year Deduction: In the year of sale, only a partial year’s depreciation is allowed, based on the applicable convention (usually half-year or mid-quarter, depending on when the aircraft was placed in service and the taxpayer’s overall asset acquisition pattern).
5. Other Considerations
- Listed Property Rules: Aircraft are listed property, so strict substantiation and business-use requirements apply. If business use drops to 50% or less before sale, recapture of excess depreciation may be required, and future depreciation must be computed using the straight-line method over the ADS recovery period.
- Section 274 Disallowance: If the aircraft was used for entertainment or commuting, expenses (including depreciation) allocable to such use are not deductible. However, depreciation disallowed under Section 274 is not subject to recapture as ordinary income, but may affect the calculation of gain on sale.
- Change in Use: If the aircraft’s use changes (e.g., from business to leasing or vice versa), the applicable recovery period and depreciation method may change, and special rules under Treas. Reg. § 1.168(i)-4 apply.
6. Recordkeeping and IRS Scrutiny
- Substantiation: The IRS is increasing scrutiny of business aircraft, focusing on substantiation of business versus personal use, proper income inclusion for personal use, and correct application of depreciation and recapture rules. Detailed flight logs and documentation are essential.
7. Summary Table of Key Code Sections
8. Conclusion
Selling an aircraft before the end of its tax depreciation period generally results in recapture of all or part of the prior depreciation deductions (including Section 179 and bonus depreciation) as ordinary income under Section 1245, up to the amount of gain realized. Any gain in excess of the recaptured amount is capital gain. If the aircraft was used for both business and personal purposes, or if business use dropped below 50%, additional recapture or loss of accelerated depreciation may apply. Proper substantiation and compliance with all applicable rules are critical, especially given the IRS’s increased audit focus on business aircraft.
Was this answer helpful?
What Blue J customers are saying
“We are excited to use Blue J to elevate the initial work product our team is able to produce."
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We had used Checkpoint for a long time but found it wasn’t particularly well-used in our practice."
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"We find this tool to be a game-changer for us and our clients.”
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“Blue J is an exciting technology because it enables the practitioner to remain in the driver’s seat of the analysis."
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"We wanted to have a tool that people were using at all staff levels."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
