Successful businesses that rely on frequent travel may benefit from buying a corporate aircraft, but aircraft ownership comes with a number of tax and non-tax implications. Here are a few of the basic tax rules that may apply.
Aircraft used only for business
When a company buys a plane for business use only, it can deduct the aircraft’s entire cost in the year the plane is placed into service unless one of the following circumstances applies:
- The taxpayer has elected out of 100% bonus depreciation but hasn’t elected to apply Sec. 179 expensing
- Neither the 100% bonus depreciation rules nor the Section 179 small business expensing rules are applicable (this is rare)
If a deduction isn’t available, the aircraft’s depreciation schedule is:
- 20% of the cost for the first year
- 32% for the second year
- 19.2% for the third year
- 11.52% for the fourth year
- 11.52% for the fifth year
- 5.76% for the sixth year
However, it’s worth noting that for property placed in service after 2022, the bonus depreciation rate is scheduled to be phased down.
These “cost recovery” rules for aircraft are actually more favorable than those for business autos, since there are no annual caps placed on depreciation and there’s no cap on Sec. 179 expensing in the year the aircraft is placed into service.
Post-acquisition expenses for business-travel-only aircraft are treated the same way as post-acquisition expenditures for other equipment and machinery. This means that routine repair and maintenance expenses are immediately deductible, but any amount spent to restore or improve the aircraft must be capitalized and depreciated.
The main difference between the tax rules governing business-only aircraft and those governing most other equipment and machinery is that company aircraft require more rigorous recordkeeping in order to show that their uses and related expenses are directly tied to business purposes.
Aircraft for business and personal use
The depreciation results discussed above won’t be affected by personal travel if the value of the travel is reported and withheld upon as compensation income to a person who isn’t “related” to the corporation or at least a 5% owner.
This means that using a corporate aircraft for personal travel won’t affect depreciation as long as the travel is by a non-share-holding employee and the value of the travel is compensation to them that is reported and withheld upon as such. However, if the person for whom the value of the travel is compensation income is a related person or at least a 5% shareholder, the depreciation results may be affected. Even in this case, there’s a generous “fail-safe” rule that a company can comply with in order to avoid affecting depreciation results.
If the value of the travel is compensation income and is reported and withheld upon as such, personal travel generally won’t affect the treatment of post-acquisition expenditures that are otherwise deductible. However, there is one limitation. The amount of the deduction for otherwise-deductible costs allocable to the personal travel can’t exceed the travel value if the person for whom the value of the travel is compensation income is:
- A person related to the corporation
- At least a 10% owner
- A director
- An officer
Final notes
As you can see, these rules aren’t especially restrictive, even your corporate aircraft is used for both business and personal travel. However, it is important to keep thorough records and to stay compliant with reporting and withholding requirements when an aircraft is used for personal travel. Other rules and limitations may also apply. If you would like to know more about the tax implications of buying a corporate aircraft, contact us.