Podcast 1
Tax Issues Associated With Business AircraftBy Peter G. Stathopoulos, Bennett Thrasher
Managing Director, State & Local Taxes
770.396.2200 or pstathopoulos@btcpa.net
Good morning. There are many tax advantages to owning an airplane used in a business that can offset some of the costs associated with aircraft ownership. However, the tax laws regarding aircraft are complex and there are many pitfalls for the unwary.
First of all, it is important to remember that, in order to deduct depreciation and operating expenses associated with owning an airplane, the expenses must be ordinary, reasonable and necessary to the business.
Otherwise, losses associated with such expenses may be deemed to be "hobby losses" that can't be applied against ordinary business income. Accordingly, taxpayers should carefully document business reasons for owning an aircraft, including increased scheduling flexibility, access to more airports, cost savings, etc. If a business loses money three years out of five, the IRS may presume that the business is really a hobby and therefore subject to "hobby loss" limitations.
This brings up the importance of a proper legal structure for owning an aircraft.
For example, it is natural for business owners to think about owning a business aircraft in a separate business entity apart from the main business for liability reasons. However, doing so can cause IRS and FAA problems if proper care is not taken. If a business aircraft is owned by a stand-alone entity that does nothing but own the aircraft, the IRS may treat the entity as provider of commercial transportation services. This would impose an additional transportation excise tax on the entity. In order to avoid this scenario, it is important for special purpose aircraft entities to avoid employing pilots. Such entities should limit their activities to "dry leases" of aircraft where the lessor (which can be the main business entity) provides its own pilots and fuel.
Improper structuring can also cause "passive loss limitation" problems. Under the Internal Revenue Code, losses from passive activities can't be deducted against ordinary business income. Furthermore, leasing of aircraft is deemed to be a passive activity, unless the taxpayer can prove otherwise. However, proper structuring of intercompany aircraft leases can avoid this problem and allow aircraft expenses to be grouped with other business income, even if the aircraft is held in a different business entity that the main business.
Although some personal use of business aircraft is allowed, personal use of aircraft can significantly limit the business' ability to deduct expenses. Furthermore, employees using an aircraft for personal business are required to include the value of personal flights in their taxable income for federal income tax purposes. There are complex rules that your advisor should examine in order to minimize loss of deductions from personal use of business aircraft.
Finally, let's not forget about state sales and property taxes. Many people mistakenly think that they can avoid state sales taxes by taking advantage of "fly-out" exemptions or taking delivery of airplanes in states that impose no or very low sales taxes on airplane purchases. However, such aircraft are actually subject to state "use" taxes (which are imposed at the same rate as sales taxes) when the owner brings the aircraft into their home state. Furthermore, the place where an aircraft is hangared controls where it is subject to use tax, not the address of the business entity that owns the aircraft or the address where the aircraft is registered for FAA purposes. Accordingly, no matter what anyone tells you, you can't avoid state sales and local property taxes by registering an aircraft in a Delaware corporation or LLC. It is possible to defer or minimize state sales taxes by setting up an intercompany leasing structure. In such cases, purchase of the aircraft can be made free from state sales/use taxes and the business can instead collect a reduced amount of sales tax on the lease payments for the aircraft.
About Bennett Thrasher, P.C.
Bennett Thrasher is one of the largest Atlanta-based full-service certified public accounting and consulting firms. We create significant value and a unique positive experience through collaboration – with and between clients, shareholders, associates and the community. Founded in 1980 by Rick Bennett and Ken Thrasher, today Bennett Thrasher boasts a dedicated, experienced team of sixteen shareholders and more than 100 professionals. In 2007, Bennett Thrasher expanded its corporate structure to include BT Capital Partners, LLC to provide a full range of investment banking services for our clients. The firm is located online at www.btcpa.net.
