Aircraft are long-life, high-cost assets that can be a major investment for an individual or business owner. A key part of aircraft ownership is understanding depreciation, which affects the value of the aircraft over time. Calculating your aircraft depreciation can be essential in determining your personal net worth or your business’s finances.

What Is Depreciation?

The accounting method known as depreciation is utilized to allocate a tangible asset’s cost over the course of the asset’s useful life. Depreciation is a way to account for the gradual wear and tear, obsolescence, and loss of value of an asset over time. Depreciation can be calculated in a number of ways, but one of the most common methods is straight-line depreciation. This method involves dividing the cost of an asset by the expected useful life to determine the annual depreciation expense.

For instance, if a company purchases a machine for $10,000 with an expected useful life of five years, you would divide $10,000 by five years. The end result would thus be $2,000 for the annual depreciation expense. This expense is recognized on the company’s income statement each year until the end of the asset’s useful life. Depreciation is important because it helps a company accurately reflect the value of its assets on balance sheets and properly calculate its net income on income statements.

Why Is Depreciation Used?

Depreciation is used for several reasons:

• To calculate taxable income: One use for depreciation is for tax purposes. Companies and individuals may be allowed to deduct the cost of an asset over its useful life for tax purposes, which reduces their taxable income and lowers their tax bill.
• To comply with accounting rules: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) require companies to use depreciation to account for the wear and tear and obsolescence of assets over time.
• To match expenses with revenues: Depreciation allows a company to allocate the cost of an asset over its useful life. This helps to match the expenses of using the asset with the revenues generated by its use. For example, if a company purchases a machine to manufacture a product that it expects to sell over a five-year period, it would be inaccurate to expense the entire cost of the machine in the year of purchase. Instead, the cost is allocated over the five-year period using depreciation.
• To provide a more accurate financial picture: Depreciation helps to provide a more accurate financial picture of a company by reflecting the decrease in value of the assets over time. This is important for investors, creditors, and other stakeholders who want to understand the company’s financial position and performance.

Understanding Aircraft Depreciation

To help you understand aircraft depreciation, we cover what aircraft depreciation is and its purpose in accounting.

What Is Aircraft Depreciation?

Aircraft depreciation is a specific type of depreciation used to allocate the cost of an aircraft over its useful life. Depreciation is an important expense for airlines and owners of private aircraft that own or lease aircraft because it reflects the decrease in value of the aircraft over time due to wear and tear, obsolescence, and changes in market demand.

Several factors can impact the useful life of an aircraft and the rate at which it depreciates, including:

1. Market demand: Changes in market demand for certain types of aircraft or routes can impact the value of an aircraft and its depreciation expense. For example, an aircraft that is in high demand for long-haul international routes may have a longer useful life and lower depreciation expense than an aircraft that is primarily used for short-haul domestic routes.
2. Age and condition: As an aircraft gets older and accumulates more hours of use, it is more likely to require maintenance, repairs, and upgrades. This can decrease its value and increase its depreciation expense.
3. Technology advancements: Advancements in aviation technology can quickly make older aircraft obsolete, reducing their value and increasing their depreciation expense.

Aircraft depreciation is typically calculated using a straight-line depreciation method, which allocates the cost of the aircraft evenly over its useful life. The useful life of an aircraft can vary depending on a number of factors, including the type of aircraft, its condition, and the market demand for it.

What Is the Purpose of Aircraft Depreciation in Accounting?

The purpose of aircraft depreciation in accounting is to allocate the cost of an aircraft over its useful life, reflecting the decrease in value of the aircraft due to wear and tear, obsolescence, and changes in market demand.

Aircraft depreciation is an important accounting concept for several reasons. Depreciation is used in accounting to:

• Calculate taxable income.
• Comply with accounting rules.
• Match expenses with revenues.
• Provide a more accurate financial picture.
• Allocate the cost of an aircraft over its useful life.

How Does Aircraft Depreciation Work?

Aircraft depreciation works by allocating the cost of an aircraft over its useful life. Aircraft depreciation is typically calculated using a straight-line depreciation method. As noted above, this method divides the cost of the aircraft by its useful life to determine the annual depreciation expense. For example, if an airline purchases an aircraft for $100 million with a useful life of 20 years, the annual depreciation expense would be $5 million — $100 million divided by 20 years.

The annual depreciation expense is recorded on the company’s income statement each year until the end of the aircraft’s useful life. The accumulated depreciation is recorded as a contra-asset account on the company’s balance sheet, which reduces the value of the asset over time. There are also several factors that can impact the rate at which an aircraft depreciates, including its age, condition, and technological advancements. These factors can impact the useful life of the aircraft and its depreciation expense.

What Is Aircraft Bonus Depreciation?

Aircraft bonus depreciation is a tax incentive that may allow you to accelerate the depreciation of your aircraft for tax purposes. Bonus depreciation may allow you to deduct a percentage of the cost of the aircraft in the year it is purchased, rather than spreading the cost over its useful life through regular depreciation.

To qualify for aircraft bonus depreciation, the aircraft must be used for business purposes at least 50% of the time. The bonus depreciation rules apply to both owned and leased aircraft, as long as the lease term is at least five years and the company is the “tax owner” of the aircraft.

Will Aircraft Bonus Depreciation Remain in 2023?

The U.S. tax laws allow for 100% bonus depreciation for qualified property placed in service before January 1, 2023, which includes new and used aircraft. However, tax laws can change frequently, and it is always possible for new legislation to be introduced that could modify or extend the current bonus depreciation rules.

Therefore, it is difficult to predict with certainty whether aircraft bonus depreciation will remain in effect in 2023 or beyond. It is possible that new legislation could be introduced that modifies or extends the current bonus depreciation rules or replaces them with a different tax incentive. It is best to consult with a tax professional for the latest information on bonus depreciation and its potential impact on your aircraft purchase or lease.

Aircraft Depreciation Rates

The bonus depreciation rates for aircraft can vary depending on the specific tax laws and regulations in a given region. Under current U.S. tax law, companies that purchase new or used aircraft can deduct 100% of the cost of the aircraft in the year it is placed in service. This applies to aircraft purchased between September 27, 2017, and January 1, 2023. After January 1, 2023, the bonus depreciation percentage is set to decrease by 20%.

Aircraft bonus depreciation rules can be subject to change and may vary based on specific circumstances, such as the type of aircraft, its intended use, and the applicable tax laws and regulations. The depreciation rates for aircraft can vary depending on several factors, including the type of aircraft, its condition, and the market demand for it. However, in general, aircraft depreciation rates can range from 5% to 20% per year.

Actual depreciation rates can vary depending on several factors. Additionally, bonus depreciation rules can also impact the depreciation rates for aircraft.

Aircraft Depreciation Rules

Aircraft depreciation rules are guidelines set by the tax authorities that determine how much an aircraft’s value can be deducted from a company’s taxable income over time. The Internal Revenue Service (IRS) has established rules for aircraft depreciation, which vary depending on the type of aircraft and its use.

For commercial aircraft used in the business of transporting passengers or cargo, the depreciation period is generally 7 years, but can be as long as 12 years if certain conditions are met. For non-commercial aircraft, such as those used for personal or pleasure use, the depreciation period is generally 5 years.

The depreciation rate is calculated using a formula that takes into account the aircraft’s cost, estimated salvage value, and useful life. The depreciation amount is then deducted from the company’s taxable income each year until the end of the depreciation period.

What Factors Affect Aircraft Depreciation Rates?

Aircraft depreciation rates can be affected by several factors, including:

1. Type of aircraft: Different types of aircraft can have different depreciation rates depending on factors such as their useful life, market demand, and maintenance costs.
2. Intended use of the aircraft: Aircraft that are used frequently or for commercial purposes may have higher depreciation rates than aircraft that are used only occasionally or for personal use.
3. Maintenance and repair costs: The cost of maintaining and repairing an aircraft can impact its depreciation rate, as higher maintenance costs may lower the value of the aircraft over time.
4. Market demand for the aircraft: If there is high demand for a particular type of aircraft, its depreciation rate may be lower than if there is low demand.
5. Age and condition of the aircraft: Generally, older aircraft and aircraft that are in poor condition will have higher depreciation rates than newer aircraft or aircraft in good condition.
6. Government regulations and incentives: Government regulations and incentives, such as bonus depreciation rules or tax credits, can impact aircraft depreciation rates.

Consider all of these factors when determining the depreciation rate for a particular aircraft.

How to Calculate Aircraft Depreciation

Aircraft depreciation can be calculated using various methods, including the straight-line method and the accelerated depreciation method. The following are some general steps to calculate aircraft depreciation using the straight-line method:

1. Determine the aircraft’s cost: First, determine your aircraft’s cost. This includes the purchase price of the aircraft, as well as any additional costs associated with acquiring or modifying the aircraft, such as financing fees, delivery charges, or installation costs.
2. Estimate the aircraft’s useful life: Next, determine the aircraft’s estimated useful life. This is the estimated period of time over which the aircraft will be used and will provide value to the business or individual. The useful life can be determined based on factors like the type of aircraft, the expected hours of use, and the expected maintenance and repair costs.
3. Determine the salvage value: The aircraft’s salvage value is the estimated value of the aircraft at the end of its useful life. The salvage value can be determined based on several factors, such as the age and condition of the aircraft, as well as the market demand for that particular type of aircraft.
4. Calculate the depreciation expense: Finally, calculate the depreciation expense of the aircraft. The annual depreciation expense can be calculated by subtracting the salvage value from the aircraft’s cost and then dividing the result by the useful life of the aircraft. This provides the amount of depreciation expense to be recognized each year.

For example, if an aircraft costs $10 million, has a useful life of 20 years, and is expected to have a salvage value of $2 million at the end of its useful life, the annual depreciation expense using the straight-line method would be $400,000 per year — $10 million – $2 million / 20 years = $400,000.

Different methods of depreciation can result in different amounts of depreciation expense, and businesses or individual aircraft owners should consult with their accountants or tax professionals to determine the most appropriate method of depreciation for their particular situation.

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Latitude 33 Aviation is the source for your private jet needs. Learn more about how you can purchase a private aircraft from Latitude 33 Aviation to receive the tax benefits of bonus depreciation.