What are the specific requirements for a lessor of commercial aircraft engines to claim bonus depreciation under Section 168(k) in 2025?
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To claim bonus depreciation under Section 168(k) for commercial aircraft engines as a lessor in 2025, several specific requirements must be met. The requirements are shaped by the Internal Revenue Code, Treasury Regulations, and recent legislative changes, including the One Big Beautiful Bill Act (OBBBA) and the Tax Cuts and Jobs Act (TCJA). Below is a comprehensive analysis of the requirements, with attention to the nuances for lessors of commercial aircraft engines.
1. Qualified Property Requirement
a. Recovery Period- The property must be “qualified property,” which includes tangible property depreciated under MACRS with a recovery period of 20 years or less. Commercial aircraft engines generally fall within this category, as they are tangible personal property with a class life less than 20 years.
b. Use in Trade or Business- The property must be used in a trade or business or held for the production of income. Leasing commercial aircraft engines to airlines or other commercial operators qualifies as a trade or business activity.
2. Original Use or Acquisition Requirement
a. Original Use- For property to qualify, the “original use” must begin with the taxpayer, or the acquisition must meet the requirements for used property. “Original use” means the first use to which the property is put, whether or not by the taxpayer. If the lessor purchases new engines and leases them, the original use begins with the lessor.
3. Acquisition and Placed-in-Service Date
a. Acquisition Date- For property acquired after January 19, 2025, the OBBBA restores 100% bonus depreciation for qualified property, including commercial aircraft engines.
b. Placed-in-Service Date- The engine must be placed in service by the lessor in 2025 or later. “Placed in service” means the property is ready and available for its intended use (i.e., available for lease).
c. Binding Contract Rule- If the property is acquired under a binding contract entered into before January 20, 2025, the phase-down rates (40% for 2025) may apply instead of 100%. Only property acquired after January 19, 2025, and not under a pre-existing binding contract, is eligible for 100% bonus depreciation.
4. Exclusions and Special Rules
a. Alternative Depreciation System (ADS)- Property required to be depreciated under ADS is not eligible for bonus depreciation. ADS is required for property used predominantly outside the United States, tax-exempt use property, tax-exempt bond-financed property, imported property subject to an Executive Order, and property for which the taxpayer elects ADS.- For commercial aircraft engines, if the engines are used predominantly outside the U.S. or are tax-exempt use property, ADS applies and bonus depreciation is not available.
b. Listed Property Rules- Aircraft and aircraft engines are “listed property.” To claim bonus depreciation, the property must be used more than 50% in a qualified business use (i.e., leasing to commercial operators for business purposes).- If business use falls to 50% or less, bonus depreciation is disallowed, and any excess depreciation must be recaptured.
c. Related Party and Carryover Basis Rules- The property must not be acquired from a related party, and the basis must not be determined by reference to the transferor’s basis (i.e., not acquired in a nonrecognition transaction).
d. Election Out- The lessor may elect out of bonus depreciation for any class of property placed in service during the year. This election is made on a timely filed tax return and is irrevocable for that class of property for the year.
5. Documentation and Substantiation
- The lessor must maintain detailed records substantiating:
- The acquisition and placed-in-service dates.
- The original use or acquisition requirements.
- The business use percentage (must be >50% for listed property).
- The cost and basis of the engine.
- The method and recovery period used.
- Any elections made (e.g., election out of bonus depreciation).
6. Recapture Rules
- If the engine ceases to be used predominantly in a qualified business use or is disposed of, any gain up to the amount of bonus depreciation previously claimed is recaptured as ordinary income under Section 1245.
7. Summary Table of Key Requirements
8. Special Considerations for Lessors
- Leasing to Commercial Operators: Leasing to airlines or other commercial operators is a qualified business use, provided the use is not predominantly outside the U.S. and is not to a tax-exempt entity in a disqualified lease.
- Short-Term Leases: If the lease term is less than 3 years and less than 30% of the class life, the property may not be treated as tax-exempt use property, which would otherwise require ADS.
- Business Use Test: The lessor must ensure that the engine is used more than 50% in a qualified business use during the year it is placed in service and throughout the recovery period to avoid recapture.
9. Conclusion
A lessor of commercial aircraft engines can claim 100% bonus depreciation under Section 168(k) in 2025 if:- The engine is tangible property with a MACRS recovery period of 20 years or less.- The engine is acquired and placed in service after January 19, 2025 (and not under a pre-existing binding contract).- The original use begins with the lessor, or the used property rules are satisfied.- The engine is not required to be depreciated under ADS (i.e., not used predominantly outside the U.S., not tax-exempt use property, etc.).- The engine is used more than 50% in a qualified business use (leasing to commercial operators).- The property is not acquired from a related party or in a carryover basis transaction.- The lessor does not elect out of bonus depreciation for that class of property.- All substantiation and documentation requirements are met.
Failure to meet any of these requirements will disqualify the engine from bonus depreciation or may trigger recapture if the requirements are not maintained throughout the recovery period.
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