POLITICS

An explainer on the scandal of five-year Modified Accelerated Cost Recovery System for Part 91 aircraft (i.e. 'corporate jet subsidies')

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Politics,Beltway Confidential,Timothy P. Carney

If you listen to Barack Obama and believe him, you probably think that there is some subsidy for corporate jets somewhere in American law. (Of course, you might  also believe the economy is strong, and that if you like your health-care plan, you can keep it.)

But you have stretch the definition of subsidy to claim a corporate jet tax break. What we really have is a period of depreciation on corporate aircraft that is shorter than the President thinks it should be.

Here's the story:

You might think that companies are taxed on the amount of money they make in a year minus the amount they spend. But that's not how our tax code works. If your business invests in equipment, you don't get to deduct that from your income -- you have to depreciate it.

Say you spend $100,000 on desks, chairs, and coffee makers in 2010. You don't get to write down $100,000 off the income you earn in 2010. That cost gets spread over 7 years -- each year until 2016 you can deduct $14,285.71. It would be better, for cash-flow purposes, to just expense it. Instead, the IRS requires you to spread it out -- depreciate it.

All different types of equipment have different periods of depreciation. Cotton gins have 10 year depreciation. A taxi depreciates over five years. The longer the period of depreciation, the better it is for appropriators' cash flow. The shorter the period, the better it is for the taxpayer's cashflow.

From what I've gathered, here's the history of aircraft depreciation: Prior to 1981, aircraft were depreciated over 7 years. The 1981 tax cut bill lowered that to 5 years. The 1986 "loophole-closing" bill changed commercial jets back to 7-year depreciation, but certain aircraft were kept at 5-year depreciation. These are "Part 91 aircraft," referring to the section of Federal Aviation Administration regulations that cover them.

As far as I can tell, that 2-year difference in depreciation schedule is the "tax break" Obama is talking about.

Basically, if you run a charter service or an airline, and you buy a plane on which you carry paying customers, you spread the deduction over 7 years. If your company buys a plane to move employees around, you spread the deduction over 5 years.

Is this fair? I don't know. I think fair would be to allow immediate expensing on all business purchases. But this much is certain: Obama, once again, is being misleading about the tax code in order to gain cheap class-warfare points.

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