Four Tax Reform Cautions When Considering Aircraft Acquisition Timing
By Colby McDowell | VanAllen
It is often said that timing is everything. That statement is particularly true when it comes to aircraft acquisition planning. For new aircraft, some of the best opportunities are often driven by end of quarter or end of year deals based on remaining inventory. Similarly, maximized value in pre-owned transactions are largely driven by the timing of availability within a given market. With the recent passage of the Tax Cuts and Jobs Act (TCJA), timing once again becomes a significant factor in aircraft acquisition planning.
As you consider your next aircraft transaction and the benefits of TCJA, there are four significant cautions when is comes to timing considerations:
1. Year-End Transactions Will Be Risky. A significant component to the TCJA is the repeal of available 1031 exchanges to defer tax liability for the sale of an aircraft. A transaction planned for year-end involving the sale of one airplane and replacement by another now presents additional financial risk should the two transactions not occur in the same year. If an organization is timing the transaction to take advantage of the 100% expensing allowance to offset the ordinary income on the sale in a particular year and the replacement aircraft fails to deliver on time, they will now face a significant tax bill – a scenario that was largely a non-issue with the 1031 exchange. Worse yet, it could cause buyers to short-cut decisions on acceptance or discrepancy resolution to meet the timing requirements. Because of this, comprehensive negotiation of default remedies and liquidated damages clauses within purchase agreements becomes even more important.
2. Manage Personal Use in Year 1. The timing of a delivery will influence personal use issues and deductibility of your new aircraft. Specifically, aircraft delivered late in the year may experience a higher percentage of personal use in year 1 due to holiday travel, etc. If so, there can be an
adverse effect to the deductibility of expenses that will have a long-term effect well beyond the first year. If this is a potential issue for you, consider using a supplemental resource like charter to manage the ratio of personal use in year 1 accordingly. Placing your client on a charter after a new aircraft has delivered will certainly raise some eyebrows. Articulating the long-term benefit will be important.
3. This is Not Saving You Money. The overarching goal in the passage of the TCJA is, in part, to stimulate corporate investment. The government is betting the GDP will increase by reducing tax liability and increasing the availability of near-term corporate cash. TCJA is not intended to put more cash in our pockets! TCJA does not change the total amount depreciated, it only changes when you can take the benefit. In fact, when comparing the previous tax structure to TCJA on a net present value basis over a 5-year life cycle ownership, the difference is negligible.
4. 100% Expensing Isn’t for Everyone. TCJA has been celebrated for its 100% expensing in year 1. However, it may not be beneficial for you. Depending on corporate profitability, available carry forward losses, and other considerations, bonus depreciation may not be advantageous for your situation. In those cases, the 5-year MACRS schedule is still available. You could also push your acquisition project to a later year.
There are numerous issues to consider in defining not only what to buy, but also when to buy it. Solid planning and consultation with your acquisition representative and tax expert is the only way to ensure that these issues are navigated to your benefit.
Learn more about specific strategies for your operation and aircraft. Contact VanAllen today.