A suggested modification in business aircraft depreciation schedules from 5 years to 7 years will have a negative impact on companies that own or lease planes. This change will increase the cost of ownership and thus, the cost of doing business as well. The concern here is that this will set a precedent and could lead to similar changes in other fields of business which will also result in reduced deductions and increased costs. Airline industry expert, Luis C. Seno delves into the details in an article for Forbes.
The current methodology for business aircraft, in fact for all manufactured capital assets used for business purposes, goes back to the days of the Reagan Administration and the Economic Recovery Act of 1984. The law effectively eliminated the old 10% Investment Tax Credit as well as the old longer term depreciation, with a new, more attractive shorter recovery period, referred to as the Modified Asset Cost Recovery System (MACRS).
Generally speaking, the interpretation was and still is that aircraft that are not for hire and owned and operated by a company for business use the five-year schedule while those aircraft operated commercially for hire utilize the not-quite-as-attractive seven-year methodology.
As we all know, depreciation under the current tax code is a tax “deduction” for the benefit of the entity that has placed the asset into service for business requirements (aircraft, bulldozer, sheet metal press, combine harvester, eight-wheel tractor-trailer). The sooner the cost of the asset can be recouped, given the time value of money, the greater effect it has with respect to the amount of tax paid by the owner. That means that lengthening the depreciation schedule marginally raises the tax bill of a company that acquired an aircraft for their business use.
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