Legacy Bashfest - Bring it on!

[Ace-of-the-Base]

Second, no one actually sees that price differential as cash, because:

a. They use a 100% capitalized lease where there is no out of pocket expense - you just start making the lease payments.

- or -

b. They buy the airplane and use the Bonus Depreciation.

I bet you don't understand the Accelerated Depreciation of Capital Assets, so I'll explain:

Normally, one can depreciate an asset on a straight line along the expected life expectancy of the capital asset. For instance, if you bought a $1 million dollar piece of equipment that had a life expectancy of 5 years, you could expect to write down $200,000 per year.

Under the Accelerated Depreciation of Capital Assets Act, you can write off 50% of value in the first year.

So, if you were to buy this piece of equipment in 2005, you would get to write down $200,000 that first year. But under accelerated depreciation, you get a bonus in that you can write down 50% of the purchase price, and all you have to give up is half of the first year's usual depreciation.

What does that look like for your million-dollar piece of equipment? Instead of depreciating $200,000 in year one, your lucky accountant gets to write down $600,000: The 50% accelerated depreciation, plus half of the usual 20%.
GV

GV, I usually like what you write, but YOU are the one who is naive here:



1. In a lease, the lessee does not get the depreciation because the bank does and it figures directly into the lease payment.



2. Depreciation is only tax DEFERRAL, not a write-off. This means that you are only deferring the tax payment and therefore, can only look at the time-value of the money that is deferred. Some then talk about like-kind exchange, this also needs to be closely scrutinized as the basis in the newly acquired aircraft is less the amount of the deferral, and so is the amount that is depreciated (deferred.)



Also, this bonus is only for purchases of new aircraft and they must be put into service by the end of 2005 (backlog at Gulfstream prevents this.)



Nice try, though.



Ace

 

[GVFlyer]

GV, I usually like what you write, but YOU are the one who is naive here:

If you will take the time to re-read my post you will see that I am precisely correct.

1. In a lease, the lessee does not get the depreciation because the bank does and it figures directly into the lease payment.

Nor did I suggest that one could depreciate a lease. What I did say is that in a 100% capitalized lease there is no initial capital outlay; the lessor just begins to make the lease payments at lease inception and that statement is exactly correct.

2. Depreciation is only tax DEFERRAL, not a write-off. This means that you are only deferring the tax payment and therefore, can only look at the time-value of the money that is deferred. Some then talk about like-kind exchange, this also needs to be closely scrutinized as the basis in the newly acquired aircraft is less the amount of the deferral, and so is the amount that is depreciated (deferred.)

Sorry, this statement is just plain wrong. I'll give you an example then an explanation.

This is the depreciation schedule for a GV recently sold by Gulfstream:

Gulfstream GV

Purchase price $45,750,000

Bonus depreciation 50% 22,875,000

Balance $22,875,000

Regular depreciation 20% 4,575,000

Total first year deduction $27,450,000

The new provision does not change the requirement that an aircraft be placed in service before depreciation can be taken; bonus depreciation on qualified aircraft will be available in 2005, no depreciation is available in 2004 for ordered aircraft not placed in service.

% first year write-offs 60%



Okay, here's the long version of how that works:



Under the Modified Accelerated Cost Recovery System ("MACRS"), owners of business aircraft have been able to recover one hundred percent of the cost of their business aircraft through depreciation deductions. The MACRS system of accelerated depreciation provides for accelerated depreciation and effectively accelerates or "front-loads" the depreciation benefits into the earlier years of ownership. As a result of the 2002 Tax Act, owners of new business aircraft have the option of taking 30% of the adjusted cost of a new aircraft in the first year as "Bonus Depreciation." The remaining 70% of the cost of their aircraft may be depreciated over the remaining tax life of the aircraft beginning in the year acquired.

The 2003 Tax Act creates a separate class of property called "50-percent bonus depreciation property." With the enactment of the 2003 Tax Act, the Gulfstream buyer has the option to treat qualifying property acquired after May 5, 2003 as "50% Bonus Property."

In order to be eligible for the 50% Bonus, an aircraft must be "qualified property" within the meaning of the Assistance Act. There are four basic requirements that must be satisfied in order for an aircraft to qualify for the 50% Bonus. As applied to aircraft, the requirements are:

1. The MACRS recovery period must be 20 years or less. (By statute, all aircraft satisfy this requirement.)
2. The "original use" of the aircraft must commence with Taxpayer on or after May 5, 2003. The 50% Bonus applies only to new aircraft but also applies to new engines, avionics packages and other capital upgrades to aircraft.
3. The Taxpayer must be purchase the aircraft after May 5, 2003 but before January 1, 2005. In addition, there can be no written binding contract for the acquisition of the aircraft in effect prior to May 6, 2003. With respect to an aircraft that is manufactured, constructed or produced by an aircraft owner or for an aircraft owner, the manufacture, construction or production must begin after May 5, 2003.
4. The buyer must place the aircraft in service prior to January 1, 2005. The pre-January 1, 2005 placed in service date is extended to pre-January 1, 2006 for aircraft "used in the trade or business of transporting persons or property," which for purposes hereof refers to aircraft that are classified as 7-year property. The adjusted basis of the aircraft to which the extension to pre-January 1, 2006 applies will be limited to the cost of the aircraft attributable to manufacture, construction or production prior to January 1, 2006. In addition, in order to qualify for the one –year extension, the aircraft must either (i) have a production period in exceeding two years or (ii) have a production period exceeding one year and a cost exceeding $1,000,000.00.

The 50% Bonus is applied in the following manner. In the year that the aircraft is first placed in service, the taxpayer may take a special depreciation deduction equal to 50% of the adjusted basis of the aircraft. Thereafter, the depreciable basis of the aircraft is reduced by the amount of the 50% Bonus for the purpose of calculating the regular depreciation deduction for the year placed in service (i.e., depreciate the remaining 50% of the basis of the aircraft over the applicable recovery period).

Some collateral information that you may find interesting concerns the Joint Explanatory Statement issued by the House and Senate Tax Conference Committee which shows how certain previously ambiguous situations are clarified as a result of the 2003 Tax Act.

Since you mentioned like kind exchanges: the Conference Committee Report also states that an aircraft acquired by a Taxpayer in a like-kind exchange or as a result of an involuntary conversion would qualify for the 50% Bonus.

Also, regarding leases, the Conference Committee Report states that leased aircraft that are sold by the original lessor to another lessor within three months of the date the aircraft was originally placed in service date will continue to be eligible for the 50% Bonus so long as the identity of the original lessee/user of the aircraft does not change. The Report recognizes that a technical correction bill may be needed to reflect this intent.



So, to summarize, Bonus Depreciation and MACRS are a write off applied to Adjusted Gross Income and normally charged off at the normalized corporate marginal tax rate of 35.5%

Also, this bonus is only for purchases of new aircraft and they must be put into service by the end of 2005 (backlog at Gulfstream prevents this.)

As you recall, we were discussing new aircraft, no one has mentioned pre-owned Gulfstreams. There are, however, strategies for their purchase as well.

If you need a delivery position for a Gulfstream product prior to the year end 2005 PM me, I know a sales executive who would like to meet with you.

Nice try, though.

Thanks



GV]

 

[Ace-of-the-Base]

Wow GV, I seem to have struck a cord.

Let me restate: Depreciation is not a write off. It is a tax deferral. When you get rid of the aircraft, you either have to recapture the amount you deferred at NORMAL rate (not capital gains) or you reduce you basis from which you start depreciation in your new asset.
The residual value on a lease is a major factor on the cost of the lease, therefore what the plane is going to be worth at resale is very important to the lessee.
Lots of text and still missing the point.

Again, nice try...but try to be more succinct next time...it shows intelligence rather than emotion (remember the uni-bomber).

Ace

 

[Uncle Sparky]

Just a quick suggestion(I'm not picking sides mind you), if you're going to make a statement questioning one's intelligence, you might want to check your spelling before you send it.

 

[Ace-of-the-Base]

Just a quick suggestion(I'm not picking sides mind you), if you're going to make a statement questioning one's intelligence, you might want to check your spelling before you send it.

I wasn't saying I had any...

Let me edit it for those who are watching.

Ace

 

[AcroChik]

One-Post Hijack

My father saved the UniBomber screed that was published in the Washington Post. Years later, when I was in university, he handed it over for me to read while I was doing one of those typical undergrad projects about "the literature of political dissent in America."

At the time, I found it very similar to John Galt's speech in Atlas Shrugged. Nevermind that I was dead wrong, not all dissent is the same dissent. But, the lefty prof handing out the grades thought it was an inspired connection and marked accordingly.

"Again, nice try...but try to be more succinct next time...it shows intelligence rather than emotion (remember the uni-bomber)."

I don't know about this, Ace. The only one here with the UniBomber's twisted passion and blatent disregard for reality seems to be LegacyDriver. But I give you high marks for effort.

Tax code is a notoriously slippery surface to get firm footing on. I've sent the accountancy/taxation point under debate off to a public company CFO I know to see if he can shine some light on it. I'll post his reply when it comes in

Personally, I care less about being right than I do about understanding.

 

[Uncle Sparky]

I wasn't saying I had any...

Ace

.......I wasn't suggesting you didn't...

Honestly, I agree with the point about "excessive" replies. I posess the attention span of a hubcap and find myself scrolling past the really long posts! As far as the meat of the current phase of this debate........I was a mechanic before I became a professional pilot. So, I'm just along for the ride. If the topic turns toward the quality of the spark plugs or which one these aircraft has the best radiator cap, I'll be standing by! I only meant that, in my opinion.....your coup de gras....probably shouldn't posess any faux de pas!

 

[Ace-of-the-Base]

Acro, Sparky,

I must say, I really like your responses. This board has too many egos and needs some levity and direction at times. I too am here to learn (even about my spelling). I am embarrassed to admit that I only scan through some of the long, rambling posts where folks are displaying their incredible knowledge and use of the English language.

Ace

 

[SkyGirl]

From the sheer volume of his post, it looks like GV emailed an info request to his finance people then edited their response into his post.

If past performance is any indicator, my bet is that GV is right!

Sorry, Ace...

-SkyGirl-

 

[Ace-of-the-Base]

Sky GIrl,

If so, it aint so bad. I'm wrong about 7 times a day average. My points are just meant to keep people from being mislead by some incomplete info that he is spouting. I have no bone to pick with the guy (except that he is wrong on some of his assertions).

Never judge by history alone...remember Enron? Great hisorical performance...

Ace