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Proposed Tax Code Changes Hurt Aircraft Industry

March 2014

A plan to overhaul the U.S. Tax Code proposed by House Ways and Means Committee Chairman Dave Camp would reduce or eliminate critical incentives supporting business aircraft production and sales.

Under current law, a business aircraft purchaser can recover its capital expenditure through annual depreciation deductions over five or seven years pursuant to the modified accelerated cost recovery system (MACRS). Chairman Camp proposes to repeal MACRS, which means that all aircraft would be depreciated on a straight-line basis over twelve years. Repealing MACRS, which is the cost-recovery rule for many types of property, not just business aircraft, is expected to have a long-term negative impact on the economy and capital investment. The slower the depreciation schedule, the less incentive to buy new property, which slows down all manufacturing, including new aircraft construction.

Chairman Camp also proposes to repeal the "like-kind" exchange provision, which is a fixture in the Tax Code. This repeal could disrupt business activity across the spectrum from real estate to business aircraft. Under the Section 1031 "like-kind exchange" rules, taxpayers can defer taxable gain on the disposition of property by exchanging the currently-owned property for other property that is of a like-kind (i.e., another business aircraft). By long-standing legislative policy, when a taxpayer exchanges one property for another of like-kind, nothing has changed economically, but capital is flowing freely to better investments. In recognition of this, the Tax Code allows the taxpayer to defer taxes on the transaction until such time as the asset is disposed of, rather than when it is exchanged for a similar asset. If this exchange cannot be done on a tax-deferred basis, the cost to dispose of the old property rises precipitously, which slows down (or stops) the acquisition of new property.

U.S. companies lead in business aircraft manufacturing, and both MACRS and tax-deferred exchanges are proven incentives supporting the production and sale of business aircraft. Accordingly, Chairman Camp's proposals are facing strong objections from U.S. business interests as a significant threat to capital spending and U.S. manufacturing equipment.