Folks, the guvmint is actually doing something to help new aircraft sales. As part of the stimulus package — whatever it’s called today — the guvmint is going to allow the purchasers of new aircraft to use accelerated depreciation. That means a big tax break early in the ownership, and earlier tax breaks are always better than later tax breaks.
I am not the expert on this subject (for those who want to consult with an expert, the man I call is Sam Miller, SLM, Inc. — [email protected]), but I can remember how it was back in the days when we had Investment Tax Credit (ITC), double-declining-balance depreciation, and other such magic. Did it help sell airplanes? Yes, it did. Do I think it will help sell airplanes in today’s economic morass? Yes, I do. Will it eliminate all the problems and will it mean that all God’s airplane salespeople gonna are get rich? Not no, but hell no.
As near as I can tell from reading and talking with Sam Miller, the main difference between the current law and the way it was in my day is that we had the ITC on top of accelerated depreciation. The ITC gave you a tax credit equal to 10 percent of the purchase price of the aircraft.
Today’s program just lets you depreciate the airplane faster. You can deduct the depreciation and thus lower your taxes by the amount of the deduction times your income tax bracket.
A tax credit is a horse of a different color entirely. The tax credit is like cash when you use it to pay your taxes. A $10,000 tax credit lowers your tax bill by $10,000. A $10,000 deduction lowers your tax credit by $10,000 multiplied by your tax bracket.
Also, you never have to pay back the ITC. Depreciation deductions on aircraft are like depreciation deductions on houses — you get to keep the taxes saved until you sell the house or aircraft, then they are refigured and you may (probably will) have to pay back the difference between the depreciation taken and the depreciation as it is refigured. You can deduct depreciation on a $500,000 aircraft until it is depreciated to zero. Then if you sell it for $250,000 you will have to pay tax on the difference between zero and the $250,000 for which you sold it.
Depreciation deductions are thus often only an interest-free loan from the guvmint. Tax credits are yours to keep. Big difference.
However, business people (and aircraft salespeople) often look at it differently. A successful contractor facing a big tax bill this year wants to lower that bill right now. Depreciation recapture in five years? He will worry about that in five years. Maybe he will have to buy a new bulldozer then. Right now he has to worry about this year’s tax bill. Such a business owner can be very receptive to a new aircraft if it saves him taxes right now.
Sam Miller offers one other big piece of advice for those considering an aircraft purchase — run it by a CPA first.
