Depreciation and Its Impact

In Business Aviation, there are essentially three different types of depreciation that aircraft owners need to be aware of and proactively manage. Each type of depreciation plays a different role in aircraft ownership.  At Mente Group, we take the time to educate our clients on the difference and importance of each. The three types of depreciation are Tax, Book and Market.

By Jeff Dorrough, Accredited Senior Appraiser and Cole White, VP Transactions

Tax depreciation can be structured using any of the previously approved methods by the IRS. Aircraft owners can select the form of depreciation that aligns best with their needs. One Example of this form of depreciation is the Tax Cuts and Jobs Act passed in December 2017, which allows aircraft owners 100 percent bonus depreciation in year one of ownership. The purpose behind this was to incentivize individuals and business owners to purchase both new and pre-owned aircraft. However, with each administration change, there is risk of change in this policy.  Another approved form of tax depreciation is MACRS (modified accelerated cost recovery system) 5 and 7 depreciation methods which are accelerated methods allowing the capitalized cost of an asset to be recovered over a specified period (5 or 7 years) via annual deductions.  We encourage anyone considering the purchase of a private business jet to take advantage of the “knowns today vs. the unknowns of tomorrow.”

The second type of depreciation is for internal accounting, known as Book depreciation.  Book depreciation uses the cost of a tangible asset allocated by a company over a stated useful life of the asset.  Traditionally, aircraft are placed on the company’s book at some sort of straight-line method.  The issue we run into many times, is that the Book depreciation percentage applied does not meet the market realities of today. Often, when a company goes to sell their aircraft, the Book Value and Market Value of the aircraft do not match. Majority of the time, the Book Value is too high as compared to Market Value of the aircraft.  This forces the company to take, in some instances, a sizeable write down. In order to mitigate this risk, we work with internal accounting groups to set a more realistic Book depreciation on the front end, thus minimizing risk of the write down on the back end.

The third type of depreciation is Market depreciation and put simply is spot pricing at any given point in time.  Market depreciation, unlike the previous forms mentioned, are neither prescribed nor predictable.  Market depreciation is greatly affected by macro and micro economic factors such as supply and demand.  Most recently the primary driver to Market depreciation has been associated with the impact from Covid-19 related issues.  Many companies use Market depreciation in conjunction with Book depreciation in which you have your prescribed depreciation being augmented periodically (annually) followed by a mark-to-market adjustment.  This mark-to-market adjustment re-aligns the basis periodically.

In closing, Mente provides many options to assist owners including counseling, analysis and the Mente MVP platform which optically highlights each of these forms of depreciation in one concise visual.

About the Authors

Jeff Dorrough is Vice President, Asset Management with Mente Group, LLC.

He is the lead appraiser and consultant for internal clients, as well as external assignments. During his career he has performed over 6,000 aircraft appraisals.  Jeff is a Senior ASA appraiser with the American Society of Appraisers in the field of Machinery and Technical Specialties, with 15 years of experience with business aircraft. Jeff is a graduate of Southern Methodist University with a major in Finance from the Cox School of Business.

He was previously the Asset Manager and lead appraiser for Bombardier Pre-Owned Aircraft Sales from 2002 through 2015, where he was directly responsible for managing the asset portfolio and valuation process. He was responsible for performing all aircraft valuations including Comparable Analysis, Trade Value Calculations, Residual Value Projections, and Damage Assessments, while providing quarterly market commentary. Jeff was instrumental in the writing and negotiation of trade policy for Bombardier Pre-Owned Aircraft Sales and assisted in the creation of damage assessment criteria which has been adopted by ASA for its education curriculum, as well as, several private industries. He conducts speaking engagements and is very active in business aircraft associations such as: NARA, NBAA, NAFA and his local chapter of ASA in Dallas, Texas.

 

Cole White is Vice President, Transactions with Mente Group, LLC.

He is responsible for managing aircraft acquisition and disposition transaction activities for the company’s Bombardier and Embraer clients.  Previously at Mente Group, he held the role of Vice President of Strategic Consulting.

Cole was recruited to play baseball at the United States Military Academy at West Point, where he was selected as an All American. Upon graduation, Cole was drafted to play professional baseball by the Pittsburgh Pirates. Prior to beginning his baseball career, and in order to fulfill his service requirements, Cole served for two years as an Armor Officer in the United States Army. He was then chosen to participate in the Selective Service Program, allowing him to pursue his life-long passion for baseball. After three years within the Pirates’ minor league organization, Cole retired from baseball and entered the private sector. Prior to joining Mente Group, Cole served as the lead Industrial Buyer for Gold Metal Recyclers in Dallas.

Cole earned a Bachelor of Business Administration Degree in Systems Management with a focus in Systems Engineering from the United States Military Academy at West Point in 2008. 

 

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