When selling or acquiring aircraft or aircraft engines held for productive use in a business, it is critical to consider the tax consequences. If not, a five to six figure tax burden could arrive unexpectedly in the mail from state and federal tax authorities. Acquaint yourself with the tax consequences by researching the Internet inputting the long tail keywords “aircraft taxes” or “aircraft sales tax deferral” and seek the counsel of your CPA.
Federal and State Capital Gains When Selling
What happens when the aircraft is sold? In the event the sales price is greater than the original sale price, a federal and state capital gains tax is imposed on the appreciation at the ordinary income rates. In addition, a recaptured depreciation tax is imposed on the depreciation taken or not on the taxpayer’s federal tax return. Depreciation represents the continuous decline in value of the asset and offsets the taxpayer’s income tax. For tangible property, the capitalized cost is recovered over a standard life or five year schedule for aircraft by annual deductions for depreciation. The tax depreciation system in the United States is the Modified Accelerated Cost Recovery System (MACRS). When a Capital asset is sold, the Internal Revenue Service imposes recaptured depreciation to tax the gain.
Should the aircraft sales price be more than original purchase price plus improvements less depreciation taken (also known as the adjusted basis) and selling expenses, such as sales commissions and closing costs, a federal and state capital gains and recaptured depreciation tax may be imposed. Bonus depreciation for new aircraft is 50 percent in 2012. To qualify for 100 percent bonus depreciation, the aircraft has to be placed in service by December 31, 2012.
Tax Deferral When Replacing
The federal, state and recaptured depreciation taxes can be deferred when a Qualified Intermediary is engaged to accommodate an Internal Revenue Service 1031 exchange. Exchange rules must be strictly followed. It is best to contact a Qualified Intermediary prior to the sale and acquisition to accommodate either a forward or reverse exchange. In a forward exchange, the old aircraft is sold prior to acquiring the replacement property. In a reverse exchange, the new aircraft is purchased before the old aircraft is sold. If the taxpayer’s intent is to replace the aircraft sold and the taxpayer’s accountant has determined a capital gain is due, then most likely a 1031 exchange makes sense. The deferral represents an indefinite, interest free loan that is due when the replacement aircraft is sold. If the aircraft is replaced, then another 1031 exchange can be initiated.
The Internal Revenue Code Section 1031 applies to both real and personal property. Aircraft owned and used for business purposes are eligible for the tax deferral, given the exchange is completed within 180 calendar days of the initial sale or purchase.
Sales and Use Tax on Acquisition
The delivery location and state where the aircraft is hangared determines the sales and use tax imposed. States with liberal fly-away exemptions allow aircraft to be received and flown out within a specified number of days to avoid the sales tax. Use tax is imposed on monthly revenues generated by use of the aircraft in the productive use of a business and no sales tax has been collected. In Florida, the current law imposes a sales tax on aircraft sales with an exemption if the sale is through a Florida dealer and the buyer is a non-resident. To qualify, the aircraft must be removed from the state within 10 days for the sales date or 20 days after completion of repairs. Alaska, Delaware, Montana, New Hampshire and Oregon do not have a sales tax. Review the tax implications of the state where the aircraft will be delivered to determine whether the sales tax issues.
