The Downward Glide: Understanding Aircraft Depreciation

When contemplating an aircraft purchase, it’s important to learn about depreciation, and how it works in terms of tax mitigation.

In the financial realm, depreciation refers to the gradual decrease in the value of an asset over time. With aircraft, this phenomenon is not just a natural part of aging; it’s also a valuable tax consideration. Aircraft depreciation operates much like the depreciation of any other asset. Both businesses and individual owners adhere to depreciation schedules. These delineate how the costs of a fixed asset are spread out over its useful life. At the close of each fiscal year, the owner categorizes the total hours flown into two groups: personal and business use.

Business Missions are Needed in Order to Take Depreciation

When an aircraft is used the mostly for personal use, taking depreciation on your tax return is not permissible. Business use of the depreciable asset must surpass its personal use. The percentage of business use determines the percentage of depreciation that an entity or individual can legitimately deduct.

Bonus Depreciation

Bonus depreciation is a hot topic. 100% depreciation on qualified business-use assets was in place through the end of 2022. After that, a phase-down was planned, with 80% bonus depreciation allowed for qualified business assets purchased and placed into service in 2023, and 60% bonus depreciation allowed for qualified business assets purchased and placed into service in 2024. For example, a $10M business aircraft purchased and placed in service by December 31, 2024, will result in $6.2M of tax depreciation, a reduction of $600,000. Note that you would need to have at least one qualifying business flight in 2024 to take the depreciation. 

Thoughts on Aircraft Financing

Another big factor in maximizing the depreciation tax benefits available is ownership structure. Thus it’s important to ensure that you set up your ownership structure for the best tax advantage.

Aircraft Ownership Structures

Ownership of aircraft in a single-purpose entity is often the most highly recommended course of action. That entity is sometimes owned by the main business and sometimes owned personally. It’s important to seek professional advice on this, as the ramifications can be far reaching. In any case, the best ownership structure should be considered and decided on prior to finalizing financing. When evaluating the numerous options for aircraft loan financing, it becomes key to understand, assess, and choose the best approach according to individual needs, business needs, and depreciation goals.

Aircraft Loans and Leasing

Aircraft loans are a popular choice for airplane financing. These term loans are structured like mortgages. They involve putting 15% – 20% or more down, and terms vary from 5 – 20 years. Loans with shorter terms generally offer longer amortizations, so they have balloon payments at the end of term. Term loans generally allow flexible ownership structures, so you can set things up to be best maximize depreciation benefits, if you qualify.
Leases are another financing option, but with leases, the lessor generally retains title to the aircraft. In that case, depreciation benefits would not be available to the lessee. Sometimes leases can be structured so the lessee retains ownership, but that is an important aspect to define up front. Finance leases for aircraft are generally only available to businesses. One advantage of leases is that they offer 100% financing, facilitating ownership  without  the high upfront costs of purchase.

The Aircraft Lenders can advise on the many aircraft financing options available, and how they relate to depreciation benefits.

The Airplane Finance Industry and Aircraft Depreciation

Tax regulations are constantly changing when it comes to aircraft depreciation. Regulations regarding ownership structures as well as management and operation are also important to consider, so it’s best to do your research early on to ensure you are pursuing the right financing option.

FAQs

  1. What is the significance of aviation finance in aircraft acquisition? Financing is the best way to preserve capital when acquiring an aircraft. It’s important to get ownership structure and mission dialed in prior to finalizing financing.
  2. What are some airplane financing options? Term loans, leases.
  3. How does aircraft depreciation influence aircraft loans and leasing decisions? Borrowers are more likely to be able to take depreciation benefits, when applicable, if they take out term loans instead of leases.
  4. What do lenders in the airplane finance industry look at when it comes to depreciation? Lenders understand why aircraft owners want depreciation benefits for aircraft and other equipment. When evaluating financial packages, they generally add depreciation back into the cash flow analysis.
  5. What are the most important things to consider when trying to achieve depreciation benefits? Seek the advice of experts! The Aircraft Lenders has a trusted network of industry partners who can help.
    • Consult with a tax professional that specializes in aviation tax laws.
    • Optimize ownership structure: consider the most advantageous ownership structure for your situation. Again, seek expert advice. Be aware of things like the “flight-department trap” that can result if you own the aircraft straight in your company name.
    • Document any internal arrangements between your holding entity and your main business with dry leases defining who has operational control of the aircraft.
    • Keep Detailed Records: maintain meticulous records of your aircraft-related expenses, repairs, and maintenance, as well as which flights are for business purposes and which are for personal purposes. This will not only help with depreciation calculations but will also serve as a valuable resource in the case of a tax audit.

Conclusion

Whether you are considering aircraft purchase or leasing, understanding the dynamics of aircraft financing, and aircraft depreciation are critical. The Aircraft Lenders can help give you deeper insight into these facets, and can help individuals and enterprises make better-informed decisions to optimize their investments in the direction of profitable gains. Given the range of options available, from aircraft loans to leasing, one should carefully assess the opportunities and should engage with a reputable aircraft financing broker such as The Aircraft Lenders to navigate the skies of aircraft finance and aircraft ownership with confidence.