Depreciation
Taking flight: Tax Aspects of Aircraft Ownership
by Victor C. Anvick, MST, EA, Atis Group LLC, copyright March 2007
prevSince Greenacre LLC will use the plane only for its own business and not make it available for public charter, its operation falls under Federal Aviation Regulation 14 CFR part 91. The appropriate asset depreciation class is 00.21 with a MACRS life of five years as long as annual business use exceeds 50% of total operation time. Even though airplanes are listed property, there are no limitations as there are for luxury automobiles. If Greenacre does use the aircraft predominantly for public charter, the appropriate asset class would be 45.0 with a MACRS life of seven years.
All appropriate half-year and mid-quarter conventions apply, regardless of whether the company qualifies for the five- or seven-year MACRS treatment. These depreciable lives apply to new or used aircraft. Aircraft on public charter flights are operated under Federal Aviation Regulation (FAR) 14 CFR part 135. This can dramatically increase maintenance and insurance costs due to higher standards and additional liability.
Greenacre LLC will not use tax depreciation for financial statement presentation. Instead, it may use a large salvage value and depreciate the remaining balance over a longer period. To show higher net book values, salvage values in the 70% to 80% range, with a book life of 10 to 12 years, are not uncommon based on the make, model and onboard equipment. Companies that have loan covenants with financial institutions that impose capital ratio requirements should consider using different book treatment to avoid having the bank call their loan.
Victor C. Anvick, MST, EA, is an aircraft owner and pilot who specializes in aviation taxation in Action, Calif. To contact Victor, or for more tax case studies see: Atis Group, LLC.
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