Aircraft Bonus Depreciation & the 50% Business Use Test

1. The 50% Qualified Business Use Test

Under IRC Section 280F, aircraft are classified as "listed property." To claim bonus depreciation or accelerated MACRS depreciation, the aircraft must be used more than 50% for "qualified business use" during the tax year.

What counts as "qualified business use"

• Use in a trade or business under Section 162 — ordinary and necessary business expenses
• Flights directly related to the owner's active business operations
• Charter/lease to unrelated parties for adequate consideration (Part 135 operations)
• Employee compensation flights (when properly reported as income)

What does NOT count toward the 50%

• Investment use (Section 212) — managing a stock portfolio, passive investing, attending shareholder meetings for holdings you don't actively manage
• Personal flights
• Entertainment flights (non-deductible post-TCJA under Section 274)
• Commuting flights

The twist: investment use still gets depreciation

If the 50% business use threshold is met, then both business and investment use can be included in calculating the deductible percentage of depreciation. So investment use matters for the size of the deduction — it just can't help you clear the 50% hurdle.

2. W-2 Employee vs. LLC Owner vs. Private Investor

The 50% test is about the nature of the activity, not your employment classification. The critical question is: are you engaged in a trade or business (Section 162) or an investment activity (Section 212)?

3. Section 162 (Trade or Business) vs. Section 212 (Investment)

This is the critical distinction. The IRS and courts use a facts-and-circumstances test to determine whether an activity rises to the level of a "trade or business."

Section 162 — Trade or Business

Per Commissioner v. Groetzinger (1987), the taxpayer must be involved in the activity with:

• Continuity and regularity — not sporadic or occasional
• Primary purpose of income or profit
• Substantial activity — more than just holding assets

Activities that typically qualify under 162

• Operating a business (any type — services, manufacturing, etc.)
• Active real estate development or management with multiple properties
• Professional consulting / advisory work
• Running a family office if structured as providing management services (see Lender Management, LLC v. Commissioner)
• Compensated service on corporate boards (regularity required)

Activities that typically fall under 212 (investment — does NOT count)

• Managing a stock/bond portfolio
• Holding passive LP/LLC interests in funds
• Attending annual meetings for companies you invest in but don't operate
• Reviewing financial reports from wealth managers
• Passive rental real estate (few properties, property manager handles everything)

4. Entity Structuring Strategies

Aircraft in a separate LLC

A common structure: aircraft owned by an LLC, which leases it to your operating business(es). This can work but has traps:

• Dry lease to a related party: The IRS has taken the position that dry leases to related businesses may not count toward the 25% test under 280F(d)(6)(B). This is the "leasing trap."
• Single-aircraft leasing: Section 280F(c)(1) exempts aircraft "leased or held for leasing by any person regularly engaged in the business of leasing." However, "a person leasing only one aircraft during a taxable year is not regularly engaged."
• Part 135 charter operation: If the LLC operates the aircraft under Part 135 and charters to unrelated parties as a genuine business, this is a trade or business. But the "substantially all" test for the for-hire exclusion from listed property requires nearly all use be charter — mixed personal/charter use won't qualify for the exclusion.

The related-party lease trap

Per TAM 200945037 (confirmed in DiDonato v. Commissioner, T.C. Memo. 2013-11): when an aircraft is leased between related parties, the IRS takes the position that all flights by a 5% owner under that lease are treated as non-qualified use — even if genuinely for business — unless the 25% independent-use exception is met. The NBAA calls this a "trap for the unwary."

Practical approach for your situation

With 50% ownership and Part 135 charter availability:

• Your personal flight hours for trade or business purposes count toward the 50% test
• Charter hours operated under Part 135 to unrelated parties are business use
• Between your business flights and the charter hours, reaching 50% should be achievable
• The entity structure (LLC, S-corp, etc.) matters less than the nature of the use

5. Part 135 Charter & the "For Hire" Exclusion

Section 280F(d)(4)(C) provides that aircraft are not treated as listed property if "substantially all of the use" is in a trade or business of transporting persons or property for compensation. If this exclusion applies, the 50% test doesn't apply at all.

When does the exclusion apply?

• The aircraft must be used substantially all (generally 85%+) for hire
• Must be to unrelated persons
• The owner must be regularly engaged in the leasing/charter business

Mixed use (your situation)

If you're using the plane ~125 hours personally and chartering ~100 hours out of 400 total, the for-hire exclusion won't apply (charter is only 25% of use). But those charter hours do count as qualified business use toward the 50% test.

MACRS recovery period note

Part 135 use changes the depreciation schedule: 7-year MACRS (vs. 5-year for Part 91 only) or 12-year ADS (vs. 6-year). If the aircraft has mixed Part 91/135 use, the recovery period of the predominant use applies. With 100% bonus depreciation under OBBBA, the recovery period matters less since you're deducting 100% in Year 1 anyway.

6. Current Bonus Depreciation Law (as of 2026)

OBBBA — signed July 4, 2025

The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualified property, including aircraft, acquired and placed in service after January 19, 2025.

Transitional election

OBBBA allows an election to take only 40% (or 60% for aircraft with longer production periods) instead of 100%. This could be useful if you want to spread the deduction across multiple years or if taking $5M in Year 1 creates AMT or other issues.

Section 179 expansion

OBBBA also raised the Section 179 limit to $2.5M (from $1M) with a $4M phaseout threshold. This provides an alternative expensing path if bonus depreciation isn't available.

7. What Happens If You Fail the 50% Test

In the year of acquisition

• No bonus depreciation — cannot claim the 100% first-year deduction
• No accelerated MACRS — must use ADS straight-line depreciation
• Depreciation is still available, just slower (6-year or 12-year straight-line)
• Only the business + investment use percentage is deductible

If business use drops below 50% in a later year

• Recapture — must include in gross income the excess depreciation taken in prior years (the difference between accelerated depreciation claimed and what ADS straight-line would have allowed)
• Switch to ADS — straight-line for current and all future years
• This can create a significant tax bill in the recapture year

8. Documentation & IRS Scrutiny

The IRS launched a dedicated compliance campaign for business aircraft in February 2024 (IR-2024-46), funded by the Inflation Reduction Act. They've released sample Information Document Requests (IDRs) showing what they'll ask for in audits.

What you must maintain

• Detailed flight logs: date, origin, destination, flight time, pilot
• Passenger manifests: every person on every flight, their relationship to you
• Business purpose for each passenger: documented contemporaneously, not reconstructed later
• Categorization of each flight: business (162), investment (212), personal, entertainment
• Purchase/sale documents and management contracts
• 280F qualified business use calculations for each tax year

9. Charitable / Nonprofit Use

Flights for charitable purposes are 100% deductible as a charitable contribution (not a business expense). This includes:

• Direct operating costs (fuel, crew, etc.) for the flight
• A proportional share of fixed costs allocable to those hours

However, charitable use is not "qualified business use" for the 280F test — it doesn't help you clear the 50% threshold. It's a separate deduction under Section 170, subject to charitable contribution limits (generally 60% of AGI for cash, 30% for capital gain property).

Key Case Law & IRS Guidance