The 2008 Economic Stimulus Act offers 50% bonus depreciation on new aircraft purchases – provided the contract is entered into in 2008, and that the aircraft be used more than 50% for qualified business use.
The emergence of the very light jet market has stimulated a market for trading aircraft purchase contracts. However, the time between a buyer and seller entering into the contract and taking ultimate delivery is often a matter of four to five years.
Can you still get the bonus depreciation if you buy somebody else’s purchase contract in 2008?
2008 CONTRACT REQUIREMENTS
Generally, the purchase of the contract rights in 2008 by an unrelated party will qualify for bonus depreciation regardless of the original contract date.
Example: Joe Smith entered into a contract with Eclipse Aviation to purchase an aircraft in 2004. He sells his aircraft purchase contract to Jim Jones, an unrelated party, in 2008 and Eclipse allows for the transfer of the position. If Mr. Jones would otherwise qualify for bonus depreciation on the new aircraft, the fact that Mr. Smith had entered into a contract prior to 2008 will not deny Mr. Jones the qualification.
However, most aircraft manufacturers discourage the transfer of positions and contractually limit them. But savvy purchasers often establish special purpose entities to hold aircraft positions and the entity ownership transfer will not violate these contractual agreements. The pre-existing contract disqualification applies only to the taxpayer and related parties - unrelated parties may acquire pre-2008 contracts without adverse tax treatment. Qualification for bonus depreciation by purchasing a special purpose entity that holds the contract would therefore be determined by the nature of the entity and its tax status.
Example: Jim Thomas formed Thomas Equipment Leasing, LLC for the purpose of acquiring a Cessna Citation Mustang. He entered into his contract in 2005 and sold the membership interest to unrelated Widget Industries Corp. Widget Industries retained the Thomas Leasing, LLC entity and reported its operations in its corporate return. Because the taxpayer of a single member limited liability company is its owner, and Mr. Thomas is not related to Widget Industries, Widget will not be excluded from qualification of bonus depreciation based on the pre-existing contract rule.
Example: In 2006, Mr. Thomas formed Thomas Industries, Inc. for the purpose of acquiring a position on an Embraer Phenom 100. Mr. Thomas elected Subchapter S status for the corporation so that he could report its operations in his individual return. He decided to sell all of his shares to Blackacre Corp., an unrelated S corporation, who would report the consolidated operations in their return. Although substantively this appears very similar to the previous example, the binding contract exception would prevent Blackacre from taking bonus depreciation. Although a single member limited liability company is a disregarded entity for tax purposes, and therefore the taxpayer is its owner; a flow through S corporation has a separate taxable existence and the pre-2008 contract would be attributable to that taxpayer and may therefore prohibit qualification for bonus depreciation treatment.
Example: Big Jet Aircraft Management, Inc. entered into a contract in 2006 to purchase a new Hawker 800XP to resell and manage for its fractional owners. Prior to the sale, Big Jet contracts with one owner to buy half of the interest in the aircraft for the position under its 2007 contract, and retains the other half. Big Jet sells their second portion of the aircraft after delivery in 2008. Assuming that Big Jet is a licensed aircraft dealer, both portions of the aircraft qualify for bonus depreciation.
Louis M. Meiners, Jr.
President
www.advocatetax.com
The emergence of the very light jet market has stimulated a market for trading aircraft purchase contracts. However, the time between a buyer and seller entering into the contract and taking ultimate delivery is often a matter of four to five years.
Can you still get the bonus depreciation if you buy somebody else’s purchase contract in 2008?
2008 CONTRACT REQUIREMENTS
Generally, the purchase of the contract rights in 2008 by an unrelated party will qualify for bonus depreciation regardless of the original contract date.
Example: Joe Smith entered into a contract with Eclipse Aviation to purchase an aircraft in 2004. He sells his aircraft purchase contract to Jim Jones, an unrelated party, in 2008 and Eclipse allows for the transfer of the position. If Mr. Jones would otherwise qualify for bonus depreciation on the new aircraft, the fact that Mr. Smith had entered into a contract prior to 2008 will not deny Mr. Jones the qualification.
However, most aircraft manufacturers discourage the transfer of positions and contractually limit them. But savvy purchasers often establish special purpose entities to hold aircraft positions and the entity ownership transfer will not violate these contractual agreements. The pre-existing contract disqualification applies only to the taxpayer and related parties - unrelated parties may acquire pre-2008 contracts without adverse tax treatment. Qualification for bonus depreciation by purchasing a special purpose entity that holds the contract would therefore be determined by the nature of the entity and its tax status.
Example: Jim Thomas formed Thomas Equipment Leasing, LLC for the purpose of acquiring a Cessna Citation Mustang. He entered into his contract in 2005 and sold the membership interest to unrelated Widget Industries Corp. Widget Industries retained the Thomas Leasing, LLC entity and reported its operations in its corporate return. Because the taxpayer of a single member limited liability company is its owner, and Mr. Thomas is not related to Widget Industries, Widget will not be excluded from qualification of bonus depreciation based on the pre-existing contract rule.
Example: In 2006, Mr. Thomas formed Thomas Industries, Inc. for the purpose of acquiring a position on an Embraer Phenom 100. Mr. Thomas elected Subchapter S status for the corporation so that he could report its operations in his individual return. He decided to sell all of his shares to Blackacre Corp., an unrelated S corporation, who would report the consolidated operations in their return. Although substantively this appears very similar to the previous example, the binding contract exception would prevent Blackacre from taking bonus depreciation. Although a single member limited liability company is a disregarded entity for tax purposes, and therefore the taxpayer is its owner; a flow through S corporation has a separate taxable existence and the pre-2008 contract would be attributable to that taxpayer and may therefore prohibit qualification for bonus depreciation treatment.
Example: Big Jet Aircraft Management, Inc. entered into a contract in 2006 to purchase a new Hawker 800XP to resell and manage for its fractional owners. Prior to the sale, Big Jet contracts with one owner to buy half of the interest in the aircraft for the position under its 2007 contract, and retains the other half. Big Jet sells their second portion of the aircraft after delivery in 2008. Assuming that Big Jet is a licensed aircraft dealer, both portions of the aircraft qualify for bonus depreciation.
Louis M. Meiners, Jr.
President
www.advocatetax.com
