New Dogfight Between Obama and Private Jet Industry

[gunfyter]

I guess that's why John Kerry parks his boat in Rhode Island instead of Mass. Taxes don't matter to the rich ....

 

[imacdog]

Or why Hollywood loves filming in Canada.....

 

[G4dude]

Or why Hollywood loves filming in Canada.....

And North Carolina...

 

[NJAowner]

I guess that's why John Kerry parks his boat in Rhode Island instead of Mass. Taxes don't matter to the rich ....

Taxes do matter. These examples are exploiting the inefficiencies in multijuridictional taxing system. But I woud tend to say that if RI had the same taxes as Mass., John Kerry would still have a boat.

 

[AirCobra]

And North Carolina...

Yet they still make the majority of films in Hollywood. It is also not solely about taxes either. The Canadian government actually doles out money to film in Canada, and although Toronto often doubles for New York, most movies are still not shot in Canada, so I don't think you have much of a point.

 

[AirCobra]

Shouldn't the NBAA's contention also work for second homes? Why do wealthy people have more than one home. Why would they double the property taxes they are paying. If taxes don't keep them from buying a beachfront home in the Hampton's, why would it stop them from purchasing an aircraft?

 

[gret]

The issue really isn’t about taxes, it is wasting resources of our industry groups pursuing an issue that is one of the least important things that they should be concerned about.

A brief recap of the issues-

Bonus depreciation simply means that you can take more depreciation in the first year than normal. To use a very simple example, a Part 91 aircraft is usually depreciated over 5 years. If an aircraft costs $20 million, you can depreciate the cost for tax purposes over the 5 years. Using the bonus rules, you would be able to take a $10 million deduction in the first year and then $2.5 million for the following 4 years. If the bonus depreciation isn’t available and you depreciate the asset on what’s called the straight line method, you would take a deduction in each of the 5 years of $4 million. In both cases, you receive $20 million deductions; the only difference is when you get them….or what is called a “timing difference”.

If the asset was acquired in what’s called a Section 1031 like kind exchange (which most are if the owner previously owned an aircraft) the depreciation deductions lose more of their importance. Won’t even try to explain this as it will bore you to tears, so you will have to trust me on this.

Most individual and smaller companies owning aircraft don’t receive the full benefits of their aircraft deductions because of their personal use. In many cases, the owners have given up even trying to fake out the IRS by claiming that trip to Aspen over President’s Day weekend was for business. In many cases, over 50% of the deductions related to an aircraft, including depreciation, aren’t even utilized and are lost forever. It all depends on personal use and you can draw you own conclusions by looking at your passengers and their destinations. Hint...busiest travel periods are Thanksgiving, year end holidays, and President's Day weekend....lot of business going on during these trips.

Aircraft depreciation deductions to companies such as Exxon, GE, JP Morgan etc. doesn’t even enter the purchase discussion. They don’t care!​

Again, the point is that giving somebody something they can’t use is meaningless and having the heads of our industry groups looking like fools makes it even worse.

This matter is pretty dry and probably doesn't deserve any attention...instead we should discuss union issues.

 

[NJAowner]

But Gret -- aren't most of the jet you describe actually acquired in a "reverse" 1031 like kind exchange utilizing a qualified intermediary?

As posted earlier, I agree with your point that that the bonus depreciation schedule results in very few sales.

 

[platinum750]

NJA supposed owner; for credibility issues please check spelling and grammer

 

[gret]

But Gret -- aren't most of the jet you describe actually acquired in a "reverse" 1031 like kind exchange utilizing a qualified intermediary?

As posted earlier, I agree with your point that that the bonus depreciation schedule results in very few sales.

Quick example of a an IRC 1031 exchange.

Company X bought their first plane 6 years ago and it cost $30 million. They owned it over 5 years so the cost basis is zero (the $30 million has been fully depreciated). X wants to buy a new plane for $40 million and the used aircraft has a value of $15 million.

X has two options, sell the old aircraft outright for $15 million…or complete a qualified 1031 exchange where the buyer of the old aircraft pays $15 million (via escrow) to the seller of the new aircraft and X comes up with boot of $25 million to complete the deal

If X had not completed a 1031 exchange and sold the aircraft to a third party, it would have to recognize a gain of $15 million and then could depreciate the new plane’s basis of $40 million….which is crazy.

Assuming a 1031 is completed, X would depreciate $25 million…cost of the new aircraft less gain deferred. X would not recognize any gain from the disposition of the old aircraft.

A brand new aircraft owner may consider the impact of bonus depreciation, but if Fat Cat Jack is buying a new G650 for $55 million and getting rid of his tired G550 (value probably $35 million via a 1031), Jack would only have an asset to depreciate of $20 million because he is deferring $35 million in gains from the fully depreciated aircraft. Fat Cat isn’t going to think twice about the depreciation consequences of the $20 million in boot. Especially if he is traveling from his New York apartment to the Palm Beach mansion on weekends December thru April…he can’t (or shouldn’t) be able to deduct the cash and deprecation expenses of these trips anyway.

Most major aircraft purchases are via 1031 exchanges and my point is that bonus depreciation is over emphasized with its influence in generating new aircraft sales because it is only calculated on the “boot” paid, not the entire purchase price.

My understanding of a reverse 1031 is that it is used when you take title to the new property prior to the sale of old property. I don’t believe this affects the tax consequences of the transaction.

As always, one should consult with a professional tax consultant, lawyer, Buddha/rabbi/priest, and your wife before doing anything.