I was talking to a dealer a couple days ago, he has two SETP deals sitting on his desk waiting for the tax bill to pass.

Bonus depreciation should be thought of as tax deferral, not tax elimination.

But you get to use the money you didn't send to the government until you sell the asset and recapture the depreciation.

For me, I've been using the government's money for the last ~6 years, which was a very good time to be using someone else's money. So I my case I'm way ahead.

But I know the day is coming when I'll sell the airplane and tax will be due.

I think you can roll it forward by buying a more expensive asset, but that's just a shell game. At some point the party's over.

I have a client who has used us to purchase two used aircraft and order a new one over the last three years, his CPA said "you're just kicking the can down the road" to which he said "as long as it says IRS on that can, I will keep kicking it!"

We'll do one more this year and then his new airplane will deliver, at that point he'll own it for years and not worry about the recapture.

It effectively eliminates some taxes because you get to deduct today dollars which are more valuable than deducting future dollars.

In real estate, the 39 year depreciation schedule is killer. You get only a fraction of the true value back in deductions, so you effectively paid taxes on income you didn't actually earn.

Mike C.

My experience of humanity makes me wonder how of the behavior that is changed by changes in depreciation has taken on a life of its own and is really just FOMO.

That is part of it! One of the reasons we have such a complex taxation system is the fact that it is designed to incentivize businesses to make investments.

It is truly a carrot and a stick.

It's pretty simple, the less in tax a company pays, the more they invest back into said company. They hire more people and buy more stuff, the people they hire pay taxes on their wages and buy stuff, all the stuff gets taxed.

Can you imagine the tax revenue just one aircraft generates on an annual basis?

In real estate, the 39 year depreciation schedule is killer. You get only a fraction of the true value back in deductions, so you effectively paid taxes on income you didn't actually earn.

Mike C.

Except if the money saved this year is going to be owed next year, you typically don't invest it in things that won't be liquid or produce quick returns.

The overall benefit to the government of the entire depreciation scheme is minimal compared to allowing full year one expensing, but they do use it as a psychological tool. All the non-accountants/tax lawyers would be better off if we scrapped the entire convoluted system and just allowed full expensing at purchase and then tax the return on sale.

Man I thought this thread was in the toilet when it drifted into discussing lavatories...

Now it's really gone to sh!t

Depreciation means you can't expense your purchase cost of an asset in the year it is incurred. It has nothing to do with "lost value", that's just a cover story to penalize business that buy capital equipment.

Consider a driller who buys a $1M drill rig. He uses it to generate $500K in revenue the first year. He has a loss of $500K the first year, $1M purchase minus $500K revenue. The next year he also makes $500K, so it takes him 2 years to break even. In the third year, he finally makes a real profit. So he shouldn't pay any taxes the first or second year, but start in the third, right?

Nope, not according to the IRS. The drill rig is, say, 10 year property, so he only gets to deduct $100K the first year 10% of the $1M rig cost, so his $500K revenue is now a "profit" of $400K. No only did he lose $500K, he now has to come up with more money to pay his taxes on "profit" he didn't actually make.

In future years, he gets to deduct the $100K each year, but as time goes by, that $100K is less and less value. He paid $1M in today dollars, but he gets to deduct only $100K per year in that year dollars. So he never truly gets his profits offset by his expenses due to depreciation.

Depreciation makes all capital expenses a losing proposition because you can never deduct the true today dollar value using future deductions.

In contrast, if there was NO depreciation at all for anything, then you get taxed on what you make each and every year. The driller profit would be a loss of $500K first year (which might offset other revenue sources), $500K the second year (which might be wiped out with carry forward loss from the first year), and then in the third year, makes an actual $500K and pays taxes on that. The driller pays taxes when he makes a true profit. Now that's fair.

The year he sells the rig, that's part of his revenue, and he gets taxes on it.

No depreciation makes way more sense and is way more fair than having it. Bonus depreciation is essentially how it should work for everything all the time, IMO.

Mike C.

Chip hit it.

Everyone doing math that said you’d only save 5% or 7% made the assumption that the buyer’s income was constant.

In the real world, many people have highly variable income. If you have a larger than usual tax bill expected one year and you don’t offset it, that money is gone as soon as you pay taxes. You can’t invest it, and you can’t offset that income with losses the next year.

It’s not just “tax deferral.”

If you use BD and you have a windfall year followed by a loss year, you can come out near even. If you don’t use BD, you end up in the hole with a large carry-forward loss.

Mike and Matt are right that full expensing would be better, but that’s not the world we live in.

Bonus depreciation allows us to live in that world while it exists.

Mike C.

Depreciation means you can't expense your purchase cost of an asset in the year it is incurred. It has nothing to do with "lost value", that's just a cover story to penalize business that buy capital equipment.

Consider a driller who buys a $1M drill rig. He uses it to generate $500K in revenue the first year. He has a loss of $500K the first year, $1M purchase minus $500K revenue. The next year he also makes $500K, so it takes him 2 years to break even. In the third year, he finally makes a real profit. So he shouldn't pay any taxes the first or second year, but start in the third, right?

Nope, not according to the IRS. The drill rig is, say, 10 year property, so he only gets to deduct $100K the first year 10% of the $1M rig cost, so his $500K revenue is now a "profit" of $400K. No only did he lose $500K, he now has to come up with more money to pay his taxes on "profit" he didn't actually make.

In future years, he gets to deduct the $100K each year, but as time goes by, that $100K is less and less value. He paid $1M in today dollars, but he gets to deduct only $100K per year in that year dollars. So he never truly gets his profits offset by his expenses due to depreciation.

Depreciation makes all capital expenses a losing proposition because you can never deduct the true today dollar value using future deductions.

In contrast, if there was NO depreciation at all for anything, then you get taxed on what you make each and every year. The driller profit would be a loss of $500K first year (which might offset other revenue sources), $500K the second year (which might be wiped out with carry forward loss from the first year), and then in the third year, makes an actual $500K and pays taxes on that. The driller pays taxes when he makes a true profit. Now that's fair.

The year he sells the rig, that's part of his revenue, and he gets taxes on it.

No depreciation makes way more sense and is way more fair than having it. Bonus depreciation is essentially how it should work for everything all the time, IMO.

Mike C.

Maybe this will help.

My scenario and I used Chat to flesh it out.

Scenario: Business Operations and Sale

Years 1–7: Operating a Profitable Business
• Annual profit: $1,000,000 per year
• Total profit over 7 years: $7,000,000
• Equipment purchased in Year 1: $700,000
• Depreciation method: Straight-line over 7 years (standard MACRS 7-year property)

Annual depreciation deduction:
• $700,000 / 7 = $100,000 per year

Over 7 years, the $700,000 in equipment is fully depreciated.

⸻

Year 8: Sale of the Business
• Business sells for: $10,000,000
• Assume basis in the business: $0 (because all initial capital has been depreciated or recovered)
• Taxable gain on sale: $10,000,000

This $10M gain is potentially subject to capital gains tax (typically 20%) and possibly Net Investment Income Tax (3.8%), so combined tax could be ~23.8% or more depending on the state.

Potential federal tax liability:
• 23.8% × $10,000,000 = $2,380,000

⸻

Strategy: Offset the Gain with Bonus Depreciation

Year 8: Purchase of Aircraft
• Purchase a $10,000,000 aircraft for business use (meets qualified business use tests: >50% business usage).
• Bonus depreciation (under §168(k)) allows 100% first-year depreciation on new or used qualified property (assuming rules from TCJA still apply in year of purchase, subject to phase-out limits).

Depreciation deduction in Year 8:
• $10,000,000 immediate deduction via bonus depreciation

⸻

Impact on Taxes in Year 8

Taxable events:
• $10M gain from business sale
• $10M deduction from aircraft purchase

Net taxable income in Year 8:
• $10M (gain) − $10M (bonus depreciation) = $0

Federal tax owed: $0 (ignoring AMT, state tax, and passive activity limits)

⸻

Caveats & Important Notes:
1. Business Use Requirement:
• Aircraft must be used >50% for qualified business use to be eligible for bonus depreciation.
• Proper logs must be kept to document usage.
2. Depreciation Recapture:
• If the aircraft is sold or business use drops below 50%, recapture rules may apply — triggering retroactive taxes on prior deductions.
3. Luxury Aircraft Rules:
• IRS scrutiny is high for private aircraft. Must show it is ordinary and necessary for the business.
4. Phase-Out of Bonus Depreciation:
• Under current law, bonus depreciation phases out starting in 2023 (80% in 2023, 60% in 2024, 40% in 2025 unless legislation changes). So the exact deduction amount depends on the purchase year.

⸻

Conclusion

In this strategy, a business owner uses bonus depreciation from a qualifying aircraft purchase to completely offset the capital gains from the sale of a business. This can defer or eliminate immediate tax liability—a powerful move if executed correctly under the current tax code.

Let me know if you’d like a version with updated phase-out percentages for 2025 or to model the tax impact using passive income rules or AMT thresholds.

And before someone says, but you sold the business, you don’t need a business aircraft… when you sell the first business, you start a consulting firm.

I prefer consulting firms that have a reason to travel to places I like to go.