A CAUTIONARY NOTE ON POSSIBLE TAX REFORM IMPACTS ON CORPORATE AIRCRAFT OWNERS
Much of the focus on current tax reform efforts in Congress has been on the proposed reduction of corporate taxes to a flat rate of 20%, or 25% for personal service corporations. Often overlooked by analysts, however, is a proposal that could negatively impact numerous individual property owners, small businesses and major corporations who have relied on a nearly 100-year old provision in the U.S. tax law that encourages capital reinvestment. In short, if current legislation were to pass as written, owners of physical assets such as corporate aircraft would not be able to defer taxable gains when upgrading to newer aircraft. This could affect, among other industries, aircraft manufacturers, resellers, brokers, appraisers, insurers and lenders.
The Tax Cuts and Jobs Act introduced in the U.S. House of Representatives November 2, 2017, contains a proposed change to Section 1031 of the Internal Revenue Code, making it applicable only to real property. Currently, Section 1031(a)(1) provides that “(n)o gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” The term “property” currently includes real and personal property and definitely includes aircraft, but The Tax Cuts and Jobs Act inserts “real” before “property.” As a result, owners of aircraft who use Section 1031 to upgrade an older aircraft for a newer more expensive aircraft would no longer be allowed to defer any taxable gain on the sale of the exchanged aircraft.
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