BUSINESS FLYING AND TAXES Hobby Loss Rule—Does it Affect your Aircraft Deductions?

Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for-profit operations. This is sometimes referred to as the “hobby loss rule.” For example, the tax court docket has many cases involving horse breeding activity disguised as profitable businesses by taxpayers. As aircraft have come under increasing scrutiny by the IRS, examiners have attempted to apply this code section to business aircraft owners.

Is your aircraft an activity engaged in for-profit operations? This is the question an IRS auditor likes to ask. A properly structured and documented business aircraft should seldom have to deal with the hobby loss rule. Unless you are involved in an aircraft rental and leasing business, your aircraft should be viewed as an asset being utilized in your operating business, and not a stand-alone aircraft business, as it is often difficult to justify the aircraft as profitable on a stand-alone basis.

For example, if you are a construction contractor and you use your aircraft to visit job sites and vendors, attend trade shows and conventions, your business aircraft is, in fact, a business tool for your construction business, similar to a bulldozer and other construction equipment. This is obvious when the aircraft is owned within the contractor business entity.

For various legal, financial and tax reasons, a business aircraft is often owned by a separate legal entity, like a limited liability company (LLC). This is often when the IRS likes to invoke the hobby loss rule in an attempt to disallow the aircraft deductions.

Case laws support the concept of grouping, where the contracting or operating business and the aircraft “business” are grouped together when the profitability test is applied. If the contracting business is profitable, by virtue of a grouping election, your aircraft business is also profitable. The requirement to group is met by demonstrating that the two businesses are inter-related, which is typically the case when the aircraft is used for various construction business trips. A detailed and well documented flight log and a business plan or financial projection are useful in proving the appropriateness of grouping the aircraft with an operating business.

Aviation Tax Consultants (ATC) (https://aviationtaxconsultants.com/) assists aircraft purchasers in acquiring aircraft in a tax-efficient manner. Our services include the elimination or reduction of sales tax at the time of purchase, maximizing income tax savings, controlling the cost of personal use of the aircraft, avoiding passive activity loss rules and complying with Federal Aviation Regulations. Cooperation with the client’s current tax and legal advisors is welcomed and encouraged.