The Economic Stimulus Act of 2008 increases limits on the amounts of capital expenditures which may be deducted as current expenses. However, due to various limitations, not all business aircraft owners will be able to take advantage of these new benefits. This article provides some practical considerations for taking advantage of these benefits.

EXPENSING UNDER SECTION 179

As a general rule, expenses that are deductible on a current basis are more valuable to a taxpayer than expenses which must be capitalized and deducted over an extended period of time. For example, a $100 deduction in the current year is worth more than the same $100 deduction spread over a five year period. However, the acquisition costs of a capital asset such as an aircraft are generally subject to depreciation over a set period of time. Section 179 of the Internal Revenue Code provides a limited exception to this rule. Under Section 179, a taxpayer is permitted to deduct up to $250,000 of the cost of a capital asset as a current expense. This benefit is limited however. To the extent that the taxpayer acquires capital assets in excess of $800,000 in the taxable year, the $250,000 benefit phases out on a dollar for dollar basis for each dollar spent on capital acquisitions in excess of $800,000. For example, Taxpayer A acquires a piston aircraft for $250,000. Taxpayer A has 2008 capital acquisitions, including the aircraft, totaling $900,000. Taxpayer A’s Section 179 benefits will be reduced for each dollar spent on capital acquisitions above $800,000. $900,000 spent for capital acquisitions minus the statutory ceiling of $800,000 results in a reduction in the Section 179 benefit of $100,000. As such, Taxpayer A will be limited to $150,000 of Section 179 benefits. If Taxpayer A’s total capital asset acquisitions equal or exceed $1,050,000, the Section 179 benefit is lost.

As the foregoing illustrates, the Section 179 benefit is valuable only to taxpayers with limited capital acquisitions. Taxpayers that acquire a turbine aircraft will generally exceed the capital asset limitation of $1,050,000 simply by virtue of the acquisition of the turbine aircraft. Nevertheless, the benefit may be extremely useful for piston aircraft buyers and for aircraft operators who have limited capital asset acquisitions in a given year. For example, a turbine aircraft owner who replaces an engine, acquires an avionics upgrade, paints their aircraft, refurbishes the interior, acquires a tug or builds or upgrades a hangar may qualify for Section 179 treatment with respect to such acquisitions.

Section 179 is only available for property eligible for accelerated MACRS depreciation. In order for property to qualify for MACRS, an asset must be used more than 50% for business purposes and may not be used predominantly outside of the United States. Readers should also note that there is no requirement that the asset acquired be “new”. Any pre-owned asset, including an aircraft, can qualify for Section 179 treatment. Note should also be taken of the fact that Section 179 expensing can be utilized in connection with Bonus Depreciation. (See companion Client Update on Bonus Depreciation.) For example, the first $250,000 of the cost of a new $600,000 aircraft could be expensed and, assuming that the other requirements for Bonus Depreciation eligibility are met, the remaining basis of $350,000 could be eligible for Bonus Depreciation treatment.

The Economic Stimulus Act of 2008 provides some significant benefits for owners of business aircraft. Increased limits on the Section 179 expensing benefit may prove useful to purchasers of small aircraft and for the acquisition of aircraft related equipment.