Critical Issues with the Pending Federal Tax Reform Legislation

With the recent passage of the Tax Cuts and Jobs Act by the United States Senate, many in the aviation industry have been discussing the impact the new legislation may have on business aviation. Aircraft buyers and sellers will both be impacted by the bill. Until the discrepancies between the House of Representatives and Senate versions of the bill are resolved and signed into law, we will not have final legislation, and there may still be an opportunity to help shape the final plan. However, we recognize that terms that are similar in both the House and Senate versions will likely become law.

Sadly, both the House and Senate’s versions of the tax reform bill eliminate the availability of like-kind exchanges of personal property, including aircraft, under Section 1031 of the Internal Revenue Code. However, both chambers have provided for 100% expensing of new equipment, meaning that a business acquiring a newly manufactured aircraft can write off 100% of the purchase price against its taxable income in the year of acquisition. This result is certainly welcomed by Original Equipment Manufacturers (OEMs) and clearly will help that segment of the market. However, the Senate version of the bill, unlike the House’s version, does not allow for 100% expensing for purchases of used equipment.

This creates a significant problem when coupled with the elimination of Section 1031 like-kind exchanges. The result is that any business which is selling an old aircraft and buying a replacement aircraft may need to pay tax on the sale and effectively will have less cash to reinvest into its replacement aircraft.

Under the Senate’s version of the bill, the only way to lessen the negative financial impact resulting from the elimination of Section 1031 exchanges would be to purchase a newly manufactured aircraft in the same year as the sale and offset the expense relating to the purchase against the taxable gain arising from the sale. However, the large majority of aircraft transactions involve purchases of more efficient and newer, but not brand-new, aircraft. Since the Senate version of the bill does not include 100% expensing for used equipment, it is important that everyone involved in business aviation contact their members of Congress and urge them to either: (a) support the House’s version of the 100% expensing provision which includes used equipment or (b) support the less expensive option of simply keeping Section 1031 like-kind exchanges available for used equipment purchases.

The legislative process is moving at lightning speed, so please contact your Representatives and Senators immediately and express the importance of addressing this issue.

Contact information for all Representatives and Senators is available at https://www. congress.gov/members.

Also, the National Business Aviation Association (NBAA) has set up an online page to contact Congress to support 100% expensing, which is available at https://www.nbaa.org/advocacy/ contact/?ISSUE=nbaa0110.

If you have ever purchased or sold an aircraft used for business purposes, or ever intend to do so in the future, this issue is vitally important to YOU. Please contact your Congressional representatives and urge them to support 100% expensing for used aircraft and/or retain Section 1031 like-kind exchanges for used equipment purchases.

  Amanda Applegate - Partner, Aerlex Law Group