This article could easily apply to every possible capital expenditure in 2022 for your business, but for the purpose of this article, let’s just focus on using an aircraft purchase as a taxable expense in 2022.
For most businesses, tax planning won’t become a concern for several months. Not to mention we have no idea how profitable our year might be based on market instability, massive inflation and a looming war. But that doesn’t mean you shouldn’t start planning now. In fact, if you wait too long, your future plan may not even be a possibility due to record low aircraft inventories and sky-rocketing prices.
Make no mistake, you must treat Q3 how you would normally treat Q4 in 2022, because everything will take longer. Chances are if you are reading this, we’re not talking about your first aircraft purchase either – we’re talking about upgrading your current airplane to a newer airplane. If that’s true, THIS ARTICLE DEFINITELY APPLIES TO YOU.
So here are the top 5 reasons to start planning and acting NOW instead of waiting until September.
Reason 1: There is little inventory
In Q4 of 2020 and 2021, I could have found and closed on an airplane for my clients in a matter of two weeks if they were highly motivated (December 31st closings are somewhat typical for us here at jetAVIVA). Now however, it takes roughly 180-240 days to find and close on an airplane for our clients due to the lack of inventory and pricing pressures caused by having too many buyers and too few airplanes. The good news is, we have seen a slight influx of inventory come to market in the past two weeks. So if time is on our side, we have the ability to find the right airplane at a fair price vs. paying a premium for that bullet-hole riddled airplane out of Zimbabwe. Rest assured, everyone else is going to start looking for their taxable aircraft purchase around September-October. In fact, jetAVIVA has typically done 40%+ of their annual business during the 4th quarter of each year. It never fails though, by Nov 1, I’m looking for the exact same XLS in the exact same price range for about 5 different clients who want to close before the end of the year. Usually I’ve been able to deliver. But that will be impossible this year. Despite my best intentions, I can’t waive a wand and magically produce an airplane. Give us plenty of time to find the right airplane for you.
Reason 2: The banks are having a tough time keeping up with values
I don’t fault the bank reps for developing a twitch when values change so dramatically from week-to-week. It’s not that they don’t realize that “the value is what someone is willing to pay for something.” Their problem has more to do with estimating what residual value might look like in 3-5 years. None of us have a crystal ball, so who knows. But one thing is for certain: we experienced more newcomers to business aviation (through ownership, fractional ownership and charter customers) as a result of the pandemic than we have seen in the past 35 years when Netjets first introduced fractional ownership. And while we may see some of those owners bail when Jet-A hits $10/gal, my guess is that most of them won’t want to go back to the airlines. The result is unprecedented demand and now only a handful of transactions each month due to the lack of inventory. So without several data points or data points with similar values – banks simply need more time to finance because their underwriters don’t know how to value the airplanes.
Reason 3: Maintenance facilities are packed and that required part could take weeks
Gone are the days of discounts and incentives to bring your airplane to a facility for a pre-buy inspection and then have your new paint and interior installed right after closing. Supply shortages, shipping delays and manpower shortages could mean your planned Dec 1 closing could get pushed out as far as March 2023. Sound crazy? Well, it’s happening now and the manufacturers and shops can’t do anything about it. They’ll probably blame COVID, but the reality is – we all know about the delays, so just plan on your pre-purchase inspection taking 2-3 times longer than what you’re used to.
Reason 4: Finding crew and scheduling crew training is hard too
Now that all the airlines are back at capacity and all those furloughed crew members are flying again, the pilot shortage is back – and it’s worse than ever. It’s further compounded by the fact that the 10% available inventory that our industry once called normal is now closer to 2%, which means all those airplanes needed crew too. So, now you’ll need extra time finding crew. Already have crew? Don’t be so sure. Those same people looking for crew might be wooing your pilots to come over and work for them. So,make sure you also take care of your crew. But the delays don’t end there. Flight Safety and Simuflite are both booked out for months for popular aircraft models. Again, plan earlier than you normally do when it comes to finding crew and booking those training slots.
Reason 5: 100% expensing expires Dec 2022
Under the Tax Cuts and Jobs Act passed in 2018, bonus depreciation will begin phasing out starting Jan 1, 2023. So, if you need a depreciable expense in 2022 and you want to take full advantage of the 100% bonus depreciation option, START SHOPPING NOW. I have great confidence that we’ll find you some options if you give us at least 3-5 months. But if you wait until late Q3 or early Q4, you may be asking for the impossible.
If you are looking to buy, chances are, you’ll also need to liquidate your current airplane too. Or maybe you’re one of the rare few who wants to sell and doesn’t need to replace your aircraft. Well pay attention, because this matters to you too. If you want to get that airplane off your books before the end of the year, most of these delays still apply. Sure… you may have the airplane under contract in less than 8 hours, but it’s the other delays that can bite you. There’s nothing worse than having a great airplane, and a ready buyer and a great purchase price, only to ground the airplane because of that widget that can’t be delivered until March.
Selling in Q3 and Q4 also means you can demand higher prices. Buyers will pay a premium to get that taxable expense in before the end of the year. They’ll also be competing with a plethora of other buyers as well (another reason to start shopping now if you’re a buyer).
To learn more about the unique selling opportunities there are for buyers and sellers in the second half of this year, check out this article by my colleague Ben Dow: The winds of change or just a passing breeze?
In a nutshell, if you are looking to buy an aircraft in 2022, start NOW. I’m not worried about selling your current airplane after we find you a new one, but this coming Q3 and Q4 are likely to be the toughest on record to close deals. Plan your strategy now.
Airplanes are unobtanium in this crazy market, but I can help. Contact me today at [email protected] or (312) 246-2508.