Overview
Depreciation is the process by which the capital cost (purchase price) of a wasting asset is absorbed into owner’s capital over time. In our system of double entry bookkeeping, this is accomplished by charging an expense, in this case depreciation expense. The amount to be charged as depreciation expense can be determined for variety of reasons (that is for book purposes or for tax purposes) and is calculated using several methods. The focus of this presentation will be depreciation within the context of business aviation for federal income tax purposes. It should be noted, however, that those interested in tax depreciation for state tax purposes should call or inquire within as state depreciation rules vary widely.
In general, an asset is depreciable for federal income tax purposes if; the property wears out, the property has a useful life that exceeds one year, and the property is used in a trade or business or for the production of income. In the case of a business aircraft, how the property is used and where the property is used will determine the
depreciation method and useful life. For example,
foreign aircraft are subject to certain restrictions for federal tax purpose not imposed on domestic aircraft. Further and because an aircraft is
listed property, the extent of its business use will determine the extent to which it is depreciable and is subject to further restrictions and rules. With regard to repairs, the question will arise as to whether the event should be capitalized and depreciated or is it an outright expense. In the business aviation context, considerable controversy surrounds
airframe & engine maintenance issues.
In a related subject for federal tax purposes, certain capital expenditures are available for immediate write-off or expensing under the provisions of § 179. Within specified limitations, this provision allows taxpayers to deduct currently what would otherwise be a depreciable capital asset. Lastly and somewhat of a hot topic issue is the matter of bonus depreciation. Bonus depreciation allows for the further acceleration of a MACRS depreciation deduction to the extent of 50% of the assets tax basis in the year acquired.
