“If you write off a business aircraft, that’s a huge red flag and you will be audited.”
This is a very common sentiment speaking to prospective aircraft owners, as well as tax advisors across the country. It is a sentiment that I disagree with, based on two decades of working exclusively with taxpayers who operate business aircraft and take tax deductions on their corporate or individual income tax returns.
IRS audit risk is a very important planning consideration as we design an ownership structure for our clients. The art of aviation tax planning is to devise an ownership structure that satisfies the myriad of competing interests: IRS compliance and audit risk, FAA regulations compliance, state sales and use tax strategy, financing and banking requirements, etc.
With proper planning, getting audited by the IRS is still an extremely rare occurrence. Certain fact situations and reporting scenarios are indeed “higher” risk which will draw attention from IRS auditors. Staying away from these high-risk reporting scenarios will be the key to stay under the IRS audit radar.
Defending an IRS Audit
Even though it is a rare occurrence, we advise our clients as if they will be audited. Keeping extremely detailed records to support the business use of their aircraft will be of utmost importance. If you are audited, the key to success is to be able to establish that the aircraft is ordinary and necessary to support your business activities and be able to support this claim with contemporaneous documentation.
Handling of Personal Use
The regulations on how personal use is handled have changed over the years. Reimbursing your company for personal use is problematic in many aspects. Understanding the current rules and applying the correct classification of flights, computation of fringe benefits is an important task annually so that the income tax return can be completed correctly.
State Sales Tax Audit Risk
Unlike IRS income tax audits, state sales and use tax audits occur on a regular basis. In some states, it is a certainty that an aircraft owner will receive a sales or use tax inquiry from the State Department of Revenue after the purchase of an aircraft. Therefore, if you are claiming a sales tax exemption on the purchase of an aircraft, you should be prepared to present documentation and flight logs to support the exemption claimed.
With the advancement of flight tracking websites, and the requirement of state aircraft registration, it is highly unlikely that you can avoid scrutiny of your aircraft from state taxing authorities by utilizing a Delaware or Montana LLC. I refer to this state tax avoidance strategy as playing a game of “hide and seek.” If caught, you will owe the sales/use tax on the purchase plus penalty and interest.
State sales and use tax planning varies greatly from state to state. Some of the more common exemptions that may be available are:
- Interstate commerce exemption
- Occasional or private party purchase exemption
- Rental and leasing exemption
- Commercial use exemption
Due to the mobile nature of an aircraft, it is important to determine if your aircraft may be subject to the jurisdiction of multiple states, such as the state of a second home or office locations.
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 passive activity loss and related party leasing rules and Federal Aviation Regulations. Cooperation with client’s current tax and legal advisors is welcome and encouraged.
