Tax Strategies And Aircraft Ownership Structures

Tax Strategies And Aircraft Ownership Structures

Aircraft ownership presents an opportunity for tax savings as well as efficient and convenient business travel. However, any ownership structure involves a delicate balance of liability/risk management, FAA compliance, and IRS compliance. Consequently, ownership structure decisions should involve the collaboration of the owner, the owner’s tax advisor, and an experienced aviation attorney before your aircraft purchase is completed.

Many liability mitigating ownership structures may violate FAA regulations. Compliance with FAA regulations, on the other hand, may increase liability exposure. The use of an entity such as an LLC to own the aircraft is a useful tool for mitigating liability, but an entity alone is rarely sufficient to insulate the true owner from liability due to the the manner in which the aircraft is operated or the pilots are employed. Other liability mitigating strategies may involve using third party pilot services and/or operating the aircraft through a third-party or charter operator. For jet aircraft, liability insurance with coverage of $100 million or more is relatively inexpensive. However, similar high limit coverage is not available for smaller aircraft.

Federal and state tax regulations present challenges for aircraft ownership. Structures that are FAA compliant or mitigate liability, may increase tax costs. In Tennessee, aircraft purchases are subject to sales and use tax of approximately seven percent (7%). Certain ownership structures can defer sales and use taxes over time and, in some instances, alleviate them altogether. Aircraft owned by entities such as an LLC or corporation may be subject to personal property tax, which can be significant, varies from county to county, and should be considered in the analysis of various ownership structures and aircraft basing decisions. Entities are often subject to excise taxes based upon net annual revenue and franchise taxes based upon aircraft value. However, franchise tax costs can be significantly reduced through different ownership structures. Tax professionals unfamiliar with structures unique to aviation ownership may be unfamiliar with aircraft tax mitigation strategies.

Federal income tax implications for aircraft ownership can be very complex and dependent not only upon the aircraft ownership structure but also the taxpayer’s specific tax circumstances. While significant deductions can be obtained through bonus depreciation, the deduction is heavily dependent upon the owner’s passive income/gain and restructuring the owner’s other income streams may be necessary to maximize tax advantages. The amount of depreciation can also be diminished by personal use of the aircraft. With certain structures, IRS rules will also deem all use as personal use diminishing the extent of depreciation deductions. Thus, maintaining detailed flight records may be necessary to preserve deductions.

– Edward A. Hadley, Aviation Attorney