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Fourth quarter means a rush to upgrade aircraft before the end of the year to capture depreciation benefits for 2026.
Prior to the 2017 tax bill, the industry benefited from “like-kind exchange” rules that allowed an aircraft owner to sell his or her aircraft and reinvest the proceeds into a new (or new-to-the-owner) aircraft while deferring taxes.
But when Congress extended bonus depreciation to used aircraft in 2017, it took away the like-kind exchange rules for aircraft to help “pay” for broader use of bonus depreciation.
The 2017 tax bill set a timetable for gradually reducing bonus depreciation, but the 2025 One Big Beautiful Bill Act made 100% bonus depreciation permanent.
Because we no longer have the benefit of like-kind exchanges, it is important to sell the aircraft to be replaced and acquire the replacement in the same tax year. The bonus depreciation will (hopefully) offset the gain from the sale of the prior aircraft—but entertainment use in the first tax year can defeat the plan.
What Is Bonus Depreciation?
Bonus depreciation is an accelerated tax deduction that permits taxpayers to deduct 100% of the cost of an aircraft in the year that it is placed in service, rather than spreading deductions over the typical five-year recovery period. However, these benefits are contingent on strict compliance with both the bonus depreciation rules and the limitations imposed on “listed property” in the Treasury regulation.
The Listed Property Rules
Aircraft are classified as “listed property,” a category of assets subject to heightened substantiation and usage requirements because they are prone to personal or entertainment use per Treasury Regulation 26 CFR 1.280F-6 (2025). The Internal Revenue Code imposes special restrictions on listed property to prevent taxpayers from claiming business deductions for property that is not predominantly used for qualified business purposes.
Under Section 280F(b), if listed property is not predominantly used in a qualified business use for any taxable year, the taxpayer must use the less favorable alternative depreciation system, which results in slower depreciation deductions and disallows bonus depreciation (26 U.S.C. §280F). “Predominantly used” means that more than 50% of the property’s total use during the taxable year must constitute qualified business use per 26 U.S.C. §280F. If this threshold is not met in the year the aircraft is placed in service, the taxpayer loses access to bonus depreciation from the outset.
What Constitutes Qualified Business Use?
The term “qualified business use” generally means use in a trade or business of the taxpayer (26 U.S.C. §280F). However, certain uses are explicitly excluded from this definition, even if they occur in connection with the taxpayer’s business activities. Most critically, the statute excludes the use of property “provided as compensation for the performance of services” by certain owners or related persons unless specific conditions are met, according to the Internal Revenue Code.
For aircraft, there is a special rule: Use that would otherwise be disqualified—such as use by a 5% owner or related person—will not disqualify the aircraft if at least 25% of the total use of the aircraft during the taxable year consists of qualified business use not described in the exclusion, per 26 U.S.C. §280F. This is often referred to as the “25% safe harbor.” If the aircraft meets this 25% threshold, then the excluded uses may be counted toward the overall 50% qualified business use requirement.
This creates a two-step test for aircraft owners. Step 1: Determine whether the aircraft’s use satisfies the 25% threshold of qualified business use, exclusive of the uses excluded under Section 280F(d)(6)(C)(i). If it does, proceed to Step 2: Determine whether, including the previously excluded uses, more than 50% of the aircraft’s total use is qualified business use. Only if both steps are satisfied can the aircraft qualify for bonus depreciation.
The Entertainment Use Trap
The most dangerous pitfall for aircraft owners in the first year is entertainment use. Section 274(a) disallows deductions for expenses related to activities that constitute entertainment, amusement or recreation, as outlined in 26 U.S.C. §274. When an aircraft is used to transport individuals to entertainment events—such as sporting events, concerts, social gatherings or recreational destinations—that use may be classified as entertainment rather than business use, per 26 CFR 1.274-10.
Entertainment use is not counted as qualified business use for purposes of the Section 280F “predominantly used” test (26 CFR 1.280F-3T). If the aircraft’s first-year use includes significant entertainment-related flights, the taxpayer may fail to meet the 50% qualified business use threshold and lose eligibility for bonus depreciation. Worse, if the aircraft was predominantly flown for qualified business purposes in the year it was placed in service but then fails the test in a subsequent year, the taxpayer must recapture the excess depreciation previously claimed and switch to the alternative depreciation system going forward (26 U.S.C. §280F).
This risk is particularly acute in the first tax year because that is when the bonus depreciation deduction is claimed. If entertainment use in year one causes the aircraft to fail the predominantly used test, bonus depreciation is disallowed from the start. There is no opportunity to “make up” for entertainment use in later years—once the aircraft is placed in service with insufficient qualified business use, the benefit is permanently lost for that taxable year.
Practical Steps To Preserve the Deduction
To preserve bonus depreciation eligibility, aircraft owners must carefully manage and document its flight purposes during the first tax year. Matt Mentzer, tax partner at Jetlaw, keeps it simple: No friends, family or fun until next year.
This means refraining from flights to sporting events, vacations or social functions, even if business discussions occur during the trip. If entertainment use is unavoidable, owners must ensure that qualified business use substantially exceeds the statutory thresholds and that all aircraft functionality is meticulously documented.
Bonus depreciation offers a powerful tax incentive for aircraft acquisition, but the benefit is fragile. Entertainment use during the first tax year can disqualify the aircraft from accelerated depreciation, resulting in the loss of substantial tax savings and potential recapture liability.
Kent S. Jackson is founder and managing partner of Jetlaw. He has contributed this legal column to BCA since 1998 and is also a type-rated airline transport pilot, flight instructor and repairman.
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