Company planes: the AJCA extends bonus depreciation, but grounds Sutherland lumber.

• Author: McGuire, Shelly
• Position: American Jobs Creation Act of 2004

The American Jobs Creation Act of 2004 (AJCA) produced both good and bad news for aircraft owners: although it extended the bonus depreciation provisions in part through 2005, taxpayers may not benefit, due to the overturn of Sutherland Lumber-Southwest, Inc., 114 TC 197 (2000), aff'd, 255 F3d 495 (8th Cir. 2001).

Extension of Bonus Depreciation

First, the good news: qualified aircraft may remain eligible for bonus depreciation if placed in service before 20116. The Job Creation and Workers Assistance Act of 2002 created the "bonus" depreciation provisions, allowing taxpayers to deduct 30% or 50% of the cost of qualified property'; see Sec. 168(k). Prior to the AJCA, these provisions applied to property placed in service after Sept. 10, 2001 and before 2005.

AJCA Section 336 extends 50% bonus depreciation for noncommercial aircraft placed in service before 2006, if the aircraft:

* Is not used to transport people or property as a trade or business (other than agriculture or firefighting);

* Is purchased by the taxpayer between Sept. 10, 2001 and before 2006, but not pursuant to a written contract entered into before Sept. 11,2001 or after 2004;

* Commences its original use with the taxpayer after Sept. 10,2001;

* Is the subject of a nonrefundable deposit of the lesser of 10% of the cost or $100,000 made by the taxpayer on the contract date; and

* Has an estimated production period of four months and costs exceeding $200,000.

The extension applies only to aircraft, not to other property: It does not apply to new parts and labor, unless they are part of the new aircraft. Capital improvements on existing aircraft must be made and placed in service before 2005 to qualify for the bonus provisions.

Personal-Use Deductions Disallowed

Second, the bad news: AJCA Section 907 caps the deductibility of the costs to operate aircraft for personal use by certain individuals, to the amount included in the user's compensation.

Under Sec. 274(a) (1), entertainment, recreation or amusement expenses are not deductible, unless a taxpayer establishes the (1) item was directly related to or associated with the active conduct of a trade or business or (2) aircraft is used in connection with the active conduct of a trade or business. Exceptions to the disallowance include costs includible in the taxable compensation of an employee (Sec. 274(e)(2)) or a nonemployee (Sec. 274(e)(9)).

Prior to the AJCA, taxpayers relied on Sutherland Lumber, in which the Eighth Circuit...