Minimizing Taxes on Aircraft

How an aircraft is registered and used can reduce the cost of flying through income tax savings, according to Louis M. Meiners, Jr of Advocate Aircraft Taxation Company. Meiners provided a primer on the issue during the recent VLJ Expo sponsored by Jetpool. He cautioned that aircraft ownership and operational structuring present challenges given the conflicts between the FAA operating regulations and those of the Internal Revenue Service.
“The FAR’s prohibit operation of aircraft for profit, which may result in fines, increased liability, and loss of insurance,” he said. “The Internal Revenue Code, however, denies deductions for activities not engaged in for profit and failure of profit motive and may result in increased taxes, penalties and interest. The FAA says one thing on use whereas the IRS says something quite different. An effective tax plan blends the issues into a workable solution.”
The tax advantages of owning an aircraft are favorable given the five-year depreciation and the economic life of 40 years and well as the favorable treatment of personal use, particularly for very light jets. Meiners also noted that there is currently a 50 percent bonus depreciation for aircraft purchased in 2008 and delivered through 2009. Related Story
Most contracts for VLJs were written before 2008 for the Cessna Mustang, the Embraer Phenom and the Eclipse 500, and, thus, do not qualify but if those positions are sold and a contract and payment is made in 2008 and delivered by the end of 2009, they may qualify for bonus depreciation. “If you create a loss through bonus depreciation you can carry it back two years or forward for 15 years,” said Meiners.
Personal use is taxed under the fringe benefit rules at fair market value. “IRS regulations provide that the taxable amount for an aircraft of 10,000 pounds or less, like the VLJs, is pennies per mile,” said Meiners. “The tax is based on the standard industry fare level (SIFL), which is about 20 cents a mile, or less than it costs to operate a car, plus $38 per trip per occupied seat. The company deducts the actual cost of the trip and the employee pays taxes on 20 cents a mile.” He added that there are limitations on personal entertainment by shareholders, so tax documentation is necessary for both business and personal trips.
In order for an aircraft to qualify for special tax treatment it must generally be used a minimum of 50 percent of the time for business. The business owner must have an honest expectation of economic profit of the underlying business when combined with the aircraft business, he said. Finally he indicated owners can generally eliminate or substantially reduce sale-and-use tax if they properly structure their aircraft acquisition. For more information see advocatetax.com.