Depreciation for any business asset depends on the cost of the asset and the useful life classification for that asset. Airplane depreciation is unique because the components of an airplane are depreciated at different rates. First the life of each component is considered, and then depreciation expense is calculated by using an allowable method such as a straight-line, declining-balance, or activity-based method. It is best to consult a tax professional when computing this type of depreciation.
When calculating airplane depreciation, the mechanical structure or the frame of the airplane is based on an estimated useful life of 25 years. Depreciation for the engine and any aircraft parts is based on 10 years of useful life. The undercarriage or landing gear is categorized as a seven-year asset. If there is a salvage value, or value at the end of the business use, then that value is subtracted prior to calculating the depreciation.
The aircraft must be used in a business or trade and be appropriate and essential for the operation of the business for the airplane depreciation to be allowed as a business deduction. In the United States, under Internal Revenue Service regulation, a taxpayer purchasing an airplane for use in a trade or business can expense a portion of the airplane’s original cost prior to calculating depreciation. This is referred to as Section 179 expense.
After the Section 179 expense is deducted in the year of purchase, a method is chosen for calculating airplane depreciation. If the straight-line method is used, the cost of the airplane components is divided by the number of years of useful life. In declining-balance depreciation, a higher percentage of depreciation is used in the early years, with less being deducted in the later years of the life of the asset. Activity-based depreciation depends on how much the asset is used in a year, such as the number of hours in flight.
There are other factors involved in calculating airplane depreciation. If, for example, an aircraft is used both for the business of a corporation and available for charter otherwise, the airplane could fall under two different classifications for depreciation. Also, if the airplane is used partially for personal use and partially for business use, the depreciation must be prorated between the two, and only the business portion is deductible. In addition, if the business use portion falls below 50 percent, then the accelerated method used under the Modified Accelerated Cost Recovery System (MACRS) cannot be used and any previous depreciation that used MACRS will have to be recaptured, meaning added back as income.