Bonus Depreciation Boom Times
There seems to be an obsession in the US around bonus depreciation. It fills my DM inbox on X, is the topic of conversation at most conferences, and people tend to make irrational decisions based on it. Aircraft purchasing is no different, but the tax advantages can make the calculus of flying private a bit more achievable and palatable.
Let me be clear: regardless of how much tax savings and regardless of how much charter revenue to offset expenses with, owning an aircraft is an incredibly expensive endeavor and it will never pay for itself if you are comparing it to flying commercial. That said, this newsletter is about buying your time back through private aviation and that’s what I’m here to guide you with.
Bonus Depreciation: A History Lesson
Humans have incredibly short memories. Sometimes it seems like remembering what happened last year or what happened 10 years ago is a special skill. Warren Buffett has used memory as a strategic advantage to beating traditional markets year-after-year. I think people forget that Bonus Depreciation is not a new thing, and it wasn’t invented by Donald Trump.
A Brief History on Depreciation
The concept of depreciation first appeared in 1913, the same year federal income tax was introduced. At that time, there was “a reasonable allowance for exhaustion, wear, and tear” on property used in business or producing income. This was codified in Section 167 of the Internal Revenue Code, but no framework existed for determining how quickly property depreciated in value, so considerable ambiguity remained.
The first appearance of accelerated depreciation came during World War II, when the Revenue Act of 1942 provided “favorable” depreciation treatment for essential production facilities. Companies could write down a significant portion of the expense in the first year, encouraging capacity expansion.
In 1954, Congress observed the stimulus generated by the World War II industrial expansion and created more structure around accelerated depreciation methods. They introduced the 200 percent declining-balance and sum-of-the-years’-digits methods for certain tangible property, and offered incentives via investment tax credits.
In 1981, as part of the Economic Recovery Tax Act (ERTA), legislators introduced ARCS (Accelerated Cost Recovery System). This was the first standardization of asset classes and clear guidelines on what could and could not be written off in an accelerated fashion. That accelerated approach incentivized capital investment, thus stimulating the economy… a hallmark of trickle-down economics. In 1986, ARCS gave way to MACRS (Modified Accelerated Cost Recovery System), because government loves an acronym.
Bonus Depreciation is Born
The first time bonus depreciation appeared in the tax code was in 2002, after the economic slowdown in the wake of 9/11. The Job Creation and Worker Assistance Act of 2002 allowed businesses to deduct 30 percent of qualified property placed in service that year, and thus the concept of bonus depreciation was born.
The first instance of 100 percent bonus depreciation occurred in September 2010, when the Small Business Jobs Act temporarily raised the rate to 100 percent through December 31, 2011 to accelerate recovery after the Great Recession. From 2012 through 2017, bonus depreciation for first‐year property hovered around 50 percent.
Everything changed in 2017.
The Tax Cuts and Jobs Act of 2017 restored the rate to 100 percent and, for the first time, applied it to used qualified property. Prior to this change, only new equipment qualified for full first‐year expensing. After 2017, businesses could purchase used equipment (including private jets) and claim 100 percent depreciation in the first year. Over time, the bonus depreciation percentage began to phase down.
Which brings us to today, June 4, 2025, when businesses can claim 40 percent bonus depreciation in the first year unless the rumors of a 100 percent return are true.
Here’s a chart so you can see how we got to 2025.
Tax Strategies and the Bonus Depreciation Context for Private Jets
There are many readers of this newsletter who are in real estate, so you’re likely intimately familiar with depreciation. There are cost segregation studies, land benefits, and passive loss carry-forward strategies. These are all great ways to make tax incentivized returns using real estate and leveraging the tax code.
Airplanes are a bit different from real estate.
No 1031 Exchange
I texted my friend KJ McCarter at Aviation Tax Consultants. He pointed out that one big difference is that there is no 1031 like-kind exchange for aircraft. That means you do not get a step-up in basis when you trade aircraft, and because used equipment only qualified for bonus depreciation starting in 2017, depreciation recapture now affects all aircraft trades.
Let’s say you buy an aircraft for $12m and a few years later you sell it for $9m. Under the MACRS schedule, you may have depreciated the aircraft $5m before selling. The remaining basis is $7m, so you would report a $2m gain (sale price $9m minus $7m remaining basis). That gain is taxed as ordinary income, which makes it very expensive.
Must Be for Business Use
The whole concept of depreciation requires business use. This means 51% or more of the aircraft use is for business to depreciate the aircraft. In some unique cases in which there is passive charter revenue and a passive leasing activity, you can use it to offset passive gains. If you’re buying an aircraft and want to know the difference between the two, you should speak with someone like KJ to make sure you’re setting it up right.
Why Bonus Depreciation Could Be Different This Time
I attended two dinners this week with aircraft brokers and other service providers. At both events, bonus depreciation dominated the conversation. The consensus in the transaction community is that bonus depreciation will reenergize the transaction volume that was lackluster in 2024. To put this in perspective, 2024 saw the fewest aircraft transactions since 2016... a year before used equipment qualified for 100 percent bonus depreciation.
I do not believe the effects will be immediate in the private aviation market, and here is the data that informs my conclusion.
Transaction Volume Lags Bonus Depreciation
If you look at the historical transaction volume data from the last 25 years and correlate it with the bonus depreciation concept, there is actually a lag between the increase in bonus depreciation and the increase in transaction volume.
My theory is what I call the “PJ Country Club Effect.”
As we’ve discussed before, private aviation is a bit of a taboo subject and hence why you read this newsletter. You can’t really talk about flying private to random people at random times. Where it does come up is at the Country Club or places like that. Taxes inevitably come up and tax strategies, and one person goes “well I bought a jet because I can depreciate it” and then others get the idea and it spreads.
Here's the data that supports this theory. This is bonus depreciation rate compared to total transaction volume (both new and used).
If you notice, 2018 had a pretty significant increase in transactions, even though the first year of 100% bonus depreciation was 2017. Its almost like the news had to travel and then people had to gear up to buy something.
Interest Rates are Higher This Time
Interest rates are higher today than they have been in the past with the 100% bonus depreciation.
Interest rates are 1% to 3.5% higher. But what does this mean?
Approximately 25-30% of business jet transactions are financed, which is an incredibly low number. In my day job as an aircraft financier, this means a small portion of transactions are being fought over by the various banks and lending institution.
But the reason it is different this time has very little to do with the cost of borrowing for the airplane, in my opinion.
When interest rates are low, capital becomes more risk seeking as it becomes yield-seeking. Buying a business jet for a tax play is a very "risk-on" type of activity, but when your risk free rate of return is 4% and many see their hurdle rate as 11-12%, the tax benefit play seems too high-risk for many even when they're paying cash. Also, remember how interest rates affect charter rates. The rate of return on charter has to be so high for people that between the tax depreciation benefit and the cash flow from the charter, smart money is going to be wanting 14-18% returns on their money at minimum.
Bringing it All Together
When we look at the lagging indicator, the 5 year treasury rate as a benchmark for cost of capital, and transaction volume, I think we can start to guess from a macro level what bonus depreciation is going to do to the aircraft market.
My crystal ball, which is not investment advice or tax advice, predicts that 2025 will resemble 2017 more than 2020 through 2022 and might even look more like 2016. Buyers of business jets are getting smarter and making better decisions than they did during the pandemic.
I expect aircraft that are twenty to twenty-five years old, such as Hawkers, Learjets, and G200s, which saw a huge bump in value during the pandemic, to continue declining in value.
However, high-pedigree aircraft will likely enjoy a modest bump in valuation because bonus-depreciation buyers who sat on the sidelines during 2024 are poised to enter the market.
There is pent-up demand, but I think it will be more of a slow burn than a shot out of a cannon, as some have predicted.
Until next week,
Preston Holland
P.s. Send this to your friend who has a huge tax bill coming up this year. Remind them that they can buy a jet and depreciate some of it this year. Then, they can fly you both around to play golf or fly fish or do whatever it is you fancy.
