Many clients have approached Aviation Tax Consultants in recent months to discuss aircraft tax planning strategies relating to the sale of their companies. Whether the aircraft is part of the current business going through a sale, or a business aircraft purchase is contemplated after the sale of the business, the following considerations are critical in ensuring the deductibility of an aircraft as a business asset.
Stock versus Asset Sales
If your company owns a business aircraft, a stock sale will likely require restructuring the existing aircraft ownership or spinning off the aircraft entity prior to the sale. This may result in the recapture of previously taken tax depreciation and immediate gain recognition. Gains are taxed as ordinary income to the extent of previously taken depreciation. Capital gains treatment is available if the aircraft has appreciated in value.
If an asset sale is negotiated, the business owner can maintain the existing corporate and aircraft ownership structure. There is minimal disruption to the tax treatment of the aircraft if continued business use can be maintained by the taxpayer.
Employee (W2) versus Independent Contractor (1099)
It is common for the owner to stay on with the new company to help with the transition or to continue to manage the company. Whether the owner stays on as an employee or an independent contractor will create very different income tax implications.
Internal Revenue Service regulations are not favorable to employees. There is very little income tax benefit for an employee who uses an aircraft for the employer’s business. On the other hand, the tax code treats business owners very favorably. Generous tax deductions are available when a business aircraft is utilized in a profitable business. Therefore, if an independent contractor or consulting / management arrangement can be negotiated with the buyer, it can facilitate the continued deductibility of a business aircraft.
Deal Structure – Earnouts
To further the independent contractor discussion, the business owner can negotiate to stay on to provide management and consulting services. A portion of the sales price of the business can be categorized as earnouts, payable as consulting fees, providing revenue that can be used to justify the ongoing operation of a business aircraft.
While a business aircraft may be an afterthought to a multimillion-dollar business acquisition, thoughtful planning at the transaction stage can allow a business owner to continue to enjoy significant income tax benefits from the use of a business aircraft after the sale of the business.
Daniel Cheung, CPA is the principal of Aviation Tax Consultants. He is based at ATC’s Scottsdale, Arizona office. ATC assists aircraft purchasers in acquiring aircraft in a tax-efficient manner. Services include the elimination or reduction of sales and use tax, maximizing income tax savings, controlling the cost of personal use of the aircraft, and complying with Federal Aviation Regulations. Cooperation with client’s tax and legal advisors is welcome and encouraged.
