2017 Tax Act - Article by Chris Jacob

At the end of 2017, Congress passed and President Donald Trump signed what is now Public law no. 115-97, the 2017 “Tax Cuts and Jobs Act” ("the Act").  The Act has several immediate and long-term effects on general aviation tax issues that aircraft owners should note. 

Elimination of Section 1031 Exchanges for Personal Property

First, the Act eliminates like-kind exchanges under Section 1031 of the Internal Revenue Code for all personal property, including aircraft, beginning in 2018.  For those taxpayers who properly initiated 1031 exchanges prior to December 31, 2017 by acquiring a replacement aircraft or selling a relinquished aircraft, the benefits of a 1031 exchange will remain available subject to the previously applicable rules to allow the taxpayers to consummate the full tax-deferred exchange.   All other aircraft owners will be henceforth subject to recapture for any taxable gain.  Thus, owners with fully tax-depreciated aircraft in particular should plan to face a considerable tax liability upon the sale of their assets. 

100% Expensing

Secondly, cushioning the impact of the loss of § 1031 exchanges, is a welcome gift in the form of 100% expensing made available through the Act to purchasers of all new and used aircraft.  Whereas previously only purchasers of factory-new aircraft were eligible for so-called “bonus” depreciation, now purchasers of used aircraft may qualify for 100% expensing for any purchase consummated after September 27, 2017 so long as the acquisition marks the buyer’s first use of the aircraft.  The 100% expensing will be available through 2022, after which eligible bonus depreciation will decrease in 20% increments per year until exhausted.  Under the prior law, absent the availability of bonus depreciation for factory-new aircraft, aircraft owners were subject to a five to seven-year depreciation schedule.  The accelerated expensing under the new scheme will permit aircraft acquired after September 27, 2018 to be fully deducted from the taxpayer’s income in the applicable tax year.

Clarification of Federal Excise Tax Applicability

Third, the Act puts to rest a longstanding dispute between the Internal Revenue Service on one hand and aircraft owners and management companies on the other over the applicability of Federal Excise Tax (“FET”) to certain payments by owners to aircraft managers.  For years, the IRS has taken the position that assorted fees and other amounts paid to aircraft management companies represent amounts paid for taxable air transportation--even when the applicable flights taken by the aircraft owners were conducted under the owner’s operational control (as defined in the Federal Aviation Regulations – which the IRS asserts the right to ignore wholesale) and payment amounts did not necessarily pertain to any specific flight (e.g., monthly management fees).  In 2008 the IRS’ Air Transportation Excise Tax Audit Guide analyzed a series of unrealistic scenarios leading a number of its agents to increasingly assess FET on management company payments.  Then, in March of 2012, the IRS chief counsel issued a memorandum setting forth the agency’s reasoning in view of what it considered to be controlling precedent, leading to a new level of scrutiny of aircraft management arrangements based on the contention that the management companies had assumed “possession, command, and control” of the aircraft and were therefore providing taxable air transportation to the owner-passengers.  Although the IRS later declared a cease-fire of sorts in May 2013 by suspending assessments related to the disputed subject matter (but not suspending audits related to the issue), the ultimate issue remained unresolved.  With the 2017 Act, the law is now explicit in providing that management company payments and owner flight costs (e.g., crew, dispatch services, flight planning, etc.) are exempt from FET. 

Elimination of Miscellaneous Itemized Deductions

Beginning in 2018 the Act eliminates miscellaneous itemized deductions including employee business expenses.  Therefore, if you previously claimed use of a personally owned aircraft as an unreimbursed business expense, the former deduction will no longer be available commencing this year. 

Complete Entertainment Disallowance

Prior to the Act business entertainment expenses directly related to your business did not result in complete disallowance provided that business was conducted immediately before, during or after the entertainment or the entertainment was clearly associated with a business goal unrelated to providing entertainment.  As of 2018, all entertainment expenditures, regardless of their relation to a business goal, are disallowed. 

Employee Commuting Expenses Not Deductible

Lastly, the Act now imposes a blanket prohibition on deducting the cost of providing transportation to employees commuting between their residences and places of work, except when necessary to ensure the safety of the employee.