BUSINESS FLYING AND TAXES Aircraft Tax Benefit Basics

An aircraft is a sizable investment. If you utilize your aircraft in a profitable operating business, you can significantly reduce the cost of your flying by deducting aircraft expenses, including depreciation. Below are some commonly asked questions that can help you determine if you can take advantage of some generous income tax benefits from your aircraft.

1.Should I write off an aircraft?

  • If you can support and justify the use of an aircraft in your business, yes, deducting operating expenses and depreciating the aircraft can help you reduce your cost of flying.

2. What is depreciation?

  • Depreciation is the recovery of the cost of a business asset over the useful life of the asset. Federal tax law allows a very generous five-year useful life for aircraft that is used in non-commercial operation. In order to depreciate the aircraft, it must be used in a trade or business, or an income-producing activity.

3. What is bonus depreciation?

  • Bonus depreciation is an incentive to accelerate depreciation deduction when a business aircraft is purchased. In 2022, 100 percent of the purchase price of an aircraft can be depreciated in the year of acquisition. This applies to new or used aircraft.

4. What is depreciation recapture?

  • When you sell your aircraft that has been depreciated, you will incur a depreciation recapture. The recapture is the gain that you will realize when the sale price exceeds the net tax basis of the aircraft. The gain recapture is taxed at ordinary income tax rate, not as capital gains.

5. Do I need an aircraft business so that I can write off my aircraft?

  • Generally, no. The preferred approach is to incorporate your aircraft into your existing business. You want to use the plane to visit clients, attend trade shows or seminars that help you become more efficient and profitable. It is very difficult to start a new business, especially an “aircraft business.”

6. How do I support the business use of my aircraft?

  • The flight log is the single most important document to support the business use of your aircraft. In the event of an IRS audit, a detailed, well-documented flight log can be the difference between a no-change audit or having deductions questioned and disallowed.
  • Your pilot logbook usually does not provide sufficient details for your trips. A tax flight log should be kept to provide detailed documentation of the business purpose of each flight.

7. How much income tax can I save?

  • Assuming that you are at 40 percent tax bracket, writing off $1 million in aircraft depreciation and expenses can reduce your income tax payment by $400,000.

8. Will I be audited by the IRS if I write off my aircraft?

  • The occurrence of an IRS income tax audit is very rare—provided that your ownership structure does not draw attention to your income tax return. Certain filing positions do attract an IRS auditor’s attention. For example, an aircraft ownership Limited Liability Company that reports sizable tax losses in consecutive tax years will draw unwanted attention from the IRS.
  • The key tax planning objective is to formulate an ownership structure that maximizes the income tax deductions available from your aircraft, while mitigating the risk of potential inquiry from the IRS.

9. Should I form a Delaware company to own my aircraft?

  • The age-old myth is to use an out-of-state entity to avoid paying sales or use tax on the purchase of an aircraft. No, you can not legally avoid paying sales or use tax by using a Delaware, Montana, or Oregon entity. The state that you domicile your aircraft has the legal authority to assess sales or use tax on your aircraft.
  • States have dramatically stepped up their enforcement efforts to assess sales or use tax on aircraft purchase. Their tactics range from obtaining aircraft registration information from the FAA to requiring airports and FBOs to submit listings of tail numbers of aircraft that are hangared at their airport, and using flight tracking and ADSB data.

10. What is sales or use tax?

  • The terms sales tax and use tax are sometimes used interchangeably. Sales tax is assessed when an aircraft is purchased in a state, unless certain exemption applies. For example, Kansas sales tax does not apply to your aircraft purchase, even though the sale and delivery takes place in Wichita because you are not a resident of Kansas. However, when you bring your aircraft back to your home state, for example Maryland, a “use tax” will apply as you are using and hangaring the plane in Maryland. Sales and use tax rates are typically identical.

11. How can I avoid paying sales or use tax?

  • Depending on your home state, different exemptions may apply that can exempt you from sales or use tax assessment. Some common exemptions:
    1. Interstate commerce exemption
    2. Casual sale exemption—when the purchase is between two private parties, not involving a manufacturer, broker, etc.
  • Rental and leasing exemption—deferral of tax due and amortizing the liability over many years.

Daniel Cheung, CPA, is the principal of Aviation Tax Consultants. He is based at ATC’s Scottsdale, Arizona, office.

Aviation Tax Consultants, LLC (www.aviationtaxconsultants.com) assists aircraft purchasers in acquiring aircraft in a tax efficient manner. Our consulting services include the elimination or reduction of sales and use tax at the time of purchase, maximizing income tax savings, controlling the cost of personal use of the aircraft, complying with Federal Aviation Regulations. Cooperation with client’s current tax and legal advisors is welcome and encouraged.