What are the limitations on Section 179 expensing for business aircraft?
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The limitations on Section 179 expensing for business aircraft are governed by several key rules and statutory provisions. Below is a comprehensive analysis of these limitations, incorporating the relevant legal details, definitions, and practical considerations:
1. General Section 179 Expensing Rules
Section 179 of the Internal Revenue Code allows a taxpayer to elect to expense the cost of qualifying property, including certain business aircraft, rather than recovering the cost through depreciation over several years. The deduction is subject to several limitations:
- Dollar Limitation: For tax year 2025, the maximum Section 179 deduction is $2,500,000, and this amount is reduced dollar-for-dollar by the amount by which the cost of Section 179 property placed in service during the year exceeds $4,000,000. These amounts are indexed for inflation for years after 2025.
- Business Income Limitation: The Section 179 deduction cannot exceed the aggregate amount of taxable income derived from the active conduct of any trade or business during the year. Any disallowed amount due to this limitation can be carried forward to future years.
- Property Must Be Acquired by Purchase and Used More Than 50% for Business: The property must be acquired by purchase for use in the active conduct of a trade or business, and must be used more than 50% for business in the year placed in service.
2. Section 179 and Business Aircraft
Eligibility: Business aircraft can qualify for Section 179 expensing if they are tangible personal property acquired by purchase for use in the active conduct of a trade or business, and are not otherwise excluded (such as property used predominantly outside the United States, or property acquired from a related party).
Special Rules for Listed Property: Aircraft are considered "listed property" under IRC §280F. This means additional substantiation and usage requirements apply:
- Predominant Business Use Requirement: To qualify for Section 179 expensing, the aircraft must be used more than 50% in a qualified business use in the year it is placed in service. If this requirement is not met, Section 179 expensing is not allowed, and the aircraft must be depreciated using the straight-line method over the Alternative Depreciation System (ADS) recovery period.
- Qualified Business Use: This generally means use in the taxpayer’s trade or business, but excludes certain uses such as leasing to a 5% owner or related person, or use as compensation unless properly included in the recipient’s income and subject to withholding.
- Special 25% Test for Aircraft: For business aircraft, in addition to the 50% test, there is a 25% test under IRC §280F(d)(6)(C)(ii). If the aircraft fails either the 50% or 25% test, accelerated depreciation (including Section 179 and bonus depreciation) is not allowed.
Recapture: If, in any year during the recovery period, the business use of the aircraft drops to 50% or less, any excess depreciation (including Section 179 expensing) must be recaptured as ordinary income. The basis of the property is increased by the recapture amount.
3. Section 280F Limitations
Section 280F imposes further limitations on depreciation (including Section 179) for "listed property," which includes most business aircraft:
- Depreciation Limitation: For passenger automobiles, there are specific dollar caps on annual depreciation deductions. For aircraft, while there is no fixed dollar cap as for automobiles, the property must meet the business use requirements described above.
- Substantiation Requirements: Taxpayers must maintain adequate records to substantiate the business use of the aircraft, including the amount, time, place, business purpose, and business relationship of each use.
4. Other Limitations and Considerations
- Leased Aircraft: Section 179 expensing is generally not available to noncorporate lessors unless certain requirements are met (e.g., the lease term is less than 50% of the class life, and business deductions exceed 15% of rental income in the first 12 months).
- Property Used Predominantly Outside the U.S.: Aircraft used mainly outside the United States do not qualify for Section 179 expensing, except as provided in IRC §168(g)(4).
- Related Party Acquisitions: Property acquired from related parties does not qualify for Section 179 expensing.
5. Summary Table of Key Section 179 Limitations for Business Aircraft
- Maximum Deduction (2025): $2,500,000 (reduced dollar-for-dollar if total Section 179 property placed in service exceeds $4,000,000)
- Business Income Limitation: Deduction cannot exceed aggregate taxable business income
- Predominant Business Use: >50% business use required in year placed in service
- Special 25% Test: Must also meet 25% qualified business use test for aircraft
- Recapture: If business use drops to 50% or less, recapture of excess depreciation required
- Leased Aircraft: Generally not eligible unless special requirements are met
- Related Party/Foreign Use: Not eligible if acquired from related party or used mainly outside U.S.
6. Practical Application
To claim Section 179 expensing for a business aircraft, a taxpayer must:
- Ensure the aircraft is used more than 50% for qualified business use (and meets the 25% test).
- Not exceed the annual dollar and business income limitations.
- Maintain detailed records substantiating business use.
- Be aware of recapture rules if business use drops below the threshold during the recovery period.
- Confirm the aircraft is not acquired from a related party and is not used predominantly outside the U.S.
If these requirements are not met, the taxpayer cannot claim Section 179 expensing for the aircraft, and must use straight-line depreciation over the ADS recovery period.
In summary: Section 179 expensing for business aircraft is subject to the general dollar and business income limitations, the property must be used more than 50% for qualified business use (and meet the 25% test), and is subject to recapture if business use drops below the threshold. Additional restrictions apply to leased aircraft, related party acquisitions, and property used predominantly outside the U.S. Detailed substantiation is required, and failure to meet these requirements results in loss of Section 179 expensing and mandatory use of straight-line depreciation under ADS.
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