As this year draws to a close, many companies are facing the repercussions of the Coronavirus pandemic and the lockdown of the economy.
There is a silver lining to this situation we’ve all been thrust into: the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. This recent legislation has reinstated the ability for taxpayers to deduct current year tax losses against income from a prior tax year and receive an immediate tax refund.
This presents the perfect opportunity to acquire a business aircraft and receive 100% bonus depreciation, plus a net operating loss carryback (NOLCB), as far back as 2015.
The below article, written by Daniel Cheung with Aviation Tax Consultants, goes into further detail of how this tax provision can benefit companies in 2020.
CARES Act – Net Operating Loss provisions can benefit business aircraft acquisition in 2020
Daniel Cheung, CPA – May 15, 2020
The recently enacted Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or ‘the Act’) reinstates the ability for taxpayers to deduct current year tax losses against income from a prior tax year and receive immediate tax refund.
The concept of a net operating loss carryback (NOLCB) is intriguing. Normally, when one’s income tax payment is remitted, it is remitted. However, NOLCB actually allows tax payments from up to five years ago to be refunded, due to a loss incurred in the current year. This may have implication for companies who are looking to purchase a business aircraft in 2020.
Here is a simple illustration. Your company has net taxable income of $2,000,000 in 2020. You are considering the purchase of a $3,000,000 business aircraft to help manage and grow your business. Assuming 100% business use of the aircraft for 2020, you will be allowed a $3,000,000 depreciation deduction on the aircraft, which will eliminate the 2020 tax liability of $700,000, assuming income tax rate of 35%. The resulting tax loss of $(1,000,000) can be carried back to tax year 2015 and applied against your 2015 taxable income. This will result in a reduction of $(1,000,000) in 2015 taxable income, which is a tax refund of $350,000. The total tax reduction is $1,050,000 on the 2020 purchase of the business aircraft. If the loss is not fully absorbed by 2015 income, the remaining loss can be
carried to 2016, 2017 tax years, etc, until fully absorbed by prior year taxable income.
The same regulations apply to S corporation or LLC pass-through entities. The difference is that the net operating loss will be reported on the shareholder’s or LLC member’s individual income tax return (Form 1040).
Due to the Coronavirus pandemic and the lockdown of the economy, many companies will experience a significant decline in income in 2020. With the acquisition of a business aircraft and 100% bonus depreciation, a taxpayer can receive income tax refunds from as far back as 2015. While it may be a daunting task to make a significant capital acquisition in the current economic environment, for those companies that are able to weather the storm and position your business for a robust rebound, this tax provision should be carefully evaluated with your tax advisors.
Daniel Cheung, CPA is a principal of Aviation Tax Consultants, LLC (ATC), with offices in Columbus, Indiana and Scottsdale, Arizona. Since its founding in 2003, ATC has been assisting taxpayers in acquiring business aircraft in a tax efficient manner, while complying with Federal Aviation Regulations and working closely with client’s tax and legal advisors. ATC’s consulting services include the elimination or reduction of sales and use tax at the time of acquisition, maximization of income tax savings, managing the cost of personal use, the compliance with passive activity loss, hobby loss and other IRS regulations.
PDF Version: 2020 CARES Act – NOLCB Update