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Tax Advantages

Typically, if property for business has a useful life of more than one year, the cost must be spread across several tax years as depreciation with a portion of the cost deducted each year.

Congress periodically reviews the amount a taxpayer can claim Alarus as the annual Section 179 amount. As part of an economic stimulus and tax-reduction package signed into law in May 2003, the expense limit was hiked to $100,000.

Lawmakers upped the immediate deduction amount in the hopes it would encourage businesses to invest in new equipment sooner. The bigger deduction is available for tax years 2003, 2004 and 2005.

But there is a way to immediately receive these income tax benefits in one tax year. The provisions of Internal Revenue Code Section 179 allow a sole proprietor, partnership or corporation to fully expense tangible property in the year it is purchased.

The election must be made in the tax year the property is first placed in service.

Any amount of property over the maximum deduction must be depreciated. For example with $129,900, you would depreciate $100K the first year and the other $29,900 over the next 5 years at $5,980 per year.

The “American Jobs Creation Act of 2004” also extends until 2007 the right of a “small business” to expense up to $102,000 a year in capital improvements. This provision only applies to taxpayers who place less than $512,000 in fixed assets into service during the tax year. The balance of any aircraft cost not recovered from bonus depreciation, or the expensing election is recovered over a 5-year period for noncommercial operators, or 7 years for commercial operators.

Due to the low purchase price of the CH2000 aircraft, 91% can be deducted in the first year. This is a huge advantage over other aircraft which cost more money. The more expensive it is, the less you can depreciate. By using the $102,000 a year in capital improvements, you can deduct 91% of the Alarus CH2000 aircraft in 2005.

Please see the program outline as presented by
Louis M. Meiners, Jr.
Advocate Aircraft Taxation Company

Using Tax Savings to Buy Your New Aircraft

Due to Favorable Depreciation and Interest Rates
Tax Savings Can Exceed Payment Cost for the First Five Years.

The Internal Revenue Code prescribes that depreciation for noncommercial aircraft is to be recomputed over a five year period on an accelerated basis. In addition, for acquisitions before December 31, 2007 by a small business, (defined as a taxpayer that invests less than $525,000 in capital improvements in a tax year), can write off up to $105,000, before calculating depreciation on the balance. Although the Internal Revenue Code provides for an accelerated cost recovery method for aircraft, commercial financing is generally available with minimal down payments and 20 year amortization with low interest rates. Through this combination of favorable financing and very rapid tax depreciation recovery, it is often possible for an aircraft owner to have little, if any invested beyond tax savings for the first five years of ownership. An example is illustrated in the chart below.

Alarus CH2000 – cost $129,900, acquire 6/30/05, 6% interest, 10% down, 20 year amortization.

Tax

The preceding chart outlines the tax results that an aircraft used 100% for business purposes. The decision on how to acquire an aircraft should be made with care including consideration of not just federal income tax consequences, but also FAA issues, liability issues, state and local tax issues, federal excise tax issues, and operation and financial considerations.

Advocate Aircraft Taxation Company is in the business of assisting aircraft owners and operators in acquiring, maintaining, and disposing of aircraft in a tax efficient manner. Services include the reduction of sales tax on acquisitions, the maximization of income tax savings, the minimization of exposure for federal excise taxes, and the minimization of imputed income for personal use of aircraft. The firm is comprised of Attorneys and Certified Public Accountants whose practice is limited to the taxation of aircraft.

Louis M. Meiners, Jr., CPA
January 17, 2005
(888) 325-1942
loum@advocatetax.com

This memorandum was designed to provide information of general interest to the public and is not intended to offer specific legal advice.

The offering of this information does not create an attorney-client relationship. You should consult Advocate Aircraft Taxation Company, or your tax advisor, if you have a matter requiring attention. For further important tax information regarding aircraft ownership and operation, please visit our website, www.advocatetax.com.