Part IV · Tax Regimes · No. 03

The recovery of capital cost

Depreciation converts the cost of business-use luxury assets — principally aircraft, charter yachts, and certain real-property improvements — into deductible expense across a defined recovery period. Bonus depreciation, §179 expensing, and the §280F listed-property limits define how aggressively that conversion can proceed.

The rule

Depreciation is permitted under §167 for property used in a trade or business or for the production of income. The mechanics for property placed in service after 1986 are set by §168 — the Modified Accelerated Cost Recovery System, or MACRS — which assigns recovery periods and conventions to defined classes of property.

Tangible personal property used in business has a finite recovery life; intangible property and most personal-use property does not. A private jet operated under a Part 91 demonstration of business use is depreciable. A jet used only for the owner's personal transportation is not. The line between the two — the documentation that establishes business use — is where most aircraft and yacht audits live.

The statutory basis

The core provisions are:

• §167 — the general allowance for depreciation of property used in a trade or business or for the production of income.
• §168 — MACRS, defining recovery periods, depreciation methods, and applicable conventions for property placed in service after 1986.
• §168(k) — bonus depreciation, the first-year additional allowance for qualified property. The TCJA's 100% rate phased down to 80% (2023), 60% (2024), and 40% (2025); the One Big Beautiful Bill Act (Pub. L. 119-21) permanently restored 100% for property acquired after 19 January 2025.
• §179 — election to expense the cost of qualifying property in the year placed in service, subject to dollar caps and a business-income limit.
• §280F — the listed-property rules, imposing heightened substantiation requirements and personal-use limits on passenger automobiles, certain aircraft, and property used for entertainment.
• §§1245, 1250 — recapture of depreciation on disposition as ordinary income.

Recovery periods for luxury assets

The class assignment is the threshold question. A taxpayer who depreciates a business jet over five years takes 20% of cost in year one under the half-year convention, against about 14.3% over seven years, and recovers cost two years sooner. The fork between 5-year and 7-year for aircraft depends on whether the predominant use is non-commercial (5-year) or commercial Part 135 (7-year) under Rev. Proc. 87-56 and IRS Publication 946.

Bonus depreciation

§168(k) permits an additional first-year deduction for qualified property — generally new and used tangible property with a recovery period of 20 years or less, acquired and placed in service within the eligibility window. The 2017 Tax Cuts and Jobs Act enacted 100% bonus depreciation for property acquired and placed in service after 27 September 2017, phasing down from 2023. The One Big Beautiful Bill Act, signed 4 July 2025, permanently restored 100% bonus depreciation for property acquired after 19 January 2025.

For property placed in service in 2026, the bonus percentage is therefore 100% if the property was acquired after 19 January 2025. Property acquired earlier (including under a binding written contract entered into before 20 January 2025) stays on the old phase-down: 20% if placed in service in 2026 (40% for longer-production-period property and certain non-commercial aircraft, which get an extra year). Illustratively, a $20 million business-use aircraft contracted for after 19 January 2025 and placed in service in 2026 can generate $20 million of first-year depreciation; the same aircraft acquired under a 2024 contract would get only the phase-down percentage as bonus plus regular MACRS on the remainder. The acquisition date — usually the binding-contract date — is now the critical fact.

Bonus depreciation is available only where the predominant business-use threshold of §280F is met for the year of acquisition and each subsequent year — see below.

§280F — the listed-property gauntlet

§280F is the principal restraint on personal use of business aircraft, yachts, and automobiles. It does three things:

1. Heightened substantiation. Listed property requires contemporaneous records of business use — date, purpose, miles or hours, persons aboard. The substantiation requirement is enforced strictly; without it, deductions are disallowed.
2. 50% predominant-use test. Listed property must be used more than 50% in a qualified business use in each year of the recovery period. Falling below 50% in a later year triggers recapture of accelerated depreciation and bonus depreciation taken in prior years.
3. Cap on automobile depreciation. For passenger automobiles, §280F caps the annual depreciation allowance at indexed amounts. The cap is the reason heavy SUVs (over 6,000 pounds GVWR), which fall outside the §280F(d)(5) "passenger automobile" definition, have been a recurring planning vehicle.

Aircraft are listed property under §280F(d)(4)(A)(ii) as property used as a means of transportation. If qualified business use is 50% or less, the aircraft must be depreciated straight-line under the alternative depreciation system and bonus depreciation is unavailable; use by 5% owners and related persons is counted as qualified business use only in limited circumstances (§280F(d)(6)(C)). Yachts are entertainment facilities subject to §274 disallowance for personal use and may also be listed property where they are used for transportation. The interaction of these provisions is what makes aircraft personal-use audits and yacht enforcement a recurring subject.

§179 expensing

§179 permits a current-year expense for the cost of qualifying property in lieu of depreciation. The deduction is capped at an indexed dollar amount per year and is phased out dollar-for-dollar when total qualifying property placed in service exceeds an indexed threshold. The One Big Beautiful Bill Act raised the limits to $2.5 million and $4 million for tax years beginning after 2024; as indexed for 2026 they are $2,560,000 and $4,090,000, with a $32,000 cap for heavy SUVs (Rev. Proc. 2025-32).

For high-cost luxury assets the §179 deduction is rarely the principal mechanism — the dollar cap is small relative to an $8 million aircraft, and 100% bonus depreciation usually does the same work. §179 has more application for smaller business equipment that incidentally includes luxury items (specialized vehicles, boats used as photography platforms, equipment for a charter operation).

Recapture

Disposition of depreciable property triggers recapture of depreciation as ordinary income under §1245 (most personal property) or §1250 (most real property). On a depreciable aircraft sold at a price exceeding adjusted basis, the gain to the extent of prior depreciation is ordinary income — taxed at the top marginal rate of 37%, plus state. Gain in excess of total depreciation is capital gain.

The economic effect is that the depreciation deduction is, in many cases, a deferral rather than a permanent benefit. The asset is exchanged for ordinary income on sale unless it is held to death (basis step-up under §1014 eliminates the recapture) or unless it is exchanged in a transaction that preserves deferral. Since the 2017 amendment to §1031, personal property is no longer eligible for like-kind exchange; the deferral path through exchange is closed for aircraft and yachts.

Interaction with other regimes

• Passive activity loss limits (§469). Depreciation deductions from a passive activity (rental, charter where the taxpayer does not materially participate) are deductible only against passive income. Material participation in a charter business is the threshold for the deductions to offset ordinary income.
• At-risk rules (§465). Deductions are limited to the amount the taxpayer has at risk in the activity, generally cash invested and recourse debt. Non-recourse aircraft financing can limit deductibility.
• Hobby-loss rule (§183). If the activity is not engaged in for profit, the income remains taxable but the related expenses (including depreciation) are miscellaneous itemized deductions, which are disallowed — a suspension that began in 2018 and was made permanent by the One Big Beautiful Bill Act. See yacht charter business.
• Excise tax on commercial aviation. Aircraft operated commercially under Part 135 are subject to the 7.5% transportation excise tax. Part 91 operations are subject to fuel excise. See Part 91 vs. Part 135.
• Sales and use tax. Sales tax at acquisition is added to basis and depreciated over the recovery period, not deducted in the year incurred.

Common planning approaches

• Document the acquisition date. With 100% bonus depreciation turning on acquisition after 19 January 2025, the date of the binding written contract matters as much as the placed-in-service date. Placed-in-service timing still determines the year of the deduction.
• Document business use. The §280F substantiation requirement is binary — without contemporaneous logs, the deduction fails. Logbooks, calendar records, and passenger manifests are the standard practice.
• Structure for material participation. Where a charter business is intended to support depreciation deductions, the owner's participation must meet the §469 material-participation tests. Hours of involvement, documentation of management activity, and the avoidance of "active manager" hired to displace the owner's role are all relevant.
• Heavy-SUV planning. Vehicles exceeding 6,000 pounds GVWR escape the §280F(a) annual cap on passenger-automobile depreciation, enabling more aggressive depreciation on business-use SUVs and pickups.
• Hold to death. For depreciable property with significant recapture, the §1014 basis step-up is the only mechanism that converts the deferred ordinary-income recapture into permanent tax benefit.

Recent developments

The dominant recent change is the One Big Beautiful Bill Act (Pub. L. 119-21, signed 4 July 2025), which made 100% bonus depreciation permanent for property acquired after 19 January 2025, ending the phase-down for new acquisitions, and raised the §179 limits.

Entertainment use of business aircraft by officers, directors, and 10% owners is governed by Treas. Reg. §1.274-10, which disallows the expenses allocable to such use. The 2017 Tax Cuts and Jobs Act eliminated the deduction for most entertainment expenses under §274 but preserved depreciation on aircraft to the extent of qualified business use; the interplay between §274 disallowance and §280F substantiation continues to produce audit disputes.

Reviewed October 2026