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Taking flight: Tax Aspects of Aircraft Ownership

by Victor C. Anvick, MST, EA, Atis Group LLC, copyright March 2007

Following 9/11 companies of all sizes increased their purchases of business aircraft to make travel easier and more convenient for employees and executives. CPAs should be aware of the tax, financial, operational and regulatory issues involved in acquiring and operating a business aircraft.

• The first step is to document why the company needs to purchase its own aircraft. To help decide what class of aircraft the company should buy, CPAs should develop a travel profile including the number of passengers, average trip length and amount of baggage.
• Another critical decision is whether to set up a separate entity to acquire the aircraft. If yes, be careful not to violate the FAA rules that carrying company officials on a company aircraft must be incidental to the entity's business.
• Each state has its own sales and use taxes for aircraft. CPAs should carefully research the relevant taxes and not depend on the sales representative's advice.
• The American Jobs Creation Act and IRS Notice 2005-45 changed the tax treatment for personal use of company aircraft. All expenses for recreation, entertainment or amusement use by "specified individuals" are disallowed unless those individuals impute the aggregate value as income on their W-2. The notice provides two methods for calculating the disallowed expenses.
• Since 9/11 increased security measures and travel restrictions have boosted sales of new and used aircraft sales, as well as fractional share programs, prepaid flight cards and air charter usage among companies of all sizes, from small businesses to international conglomerates. With the recent FAA certification of the first very light jet (VLJ) and other companies planning to enter the market, private jet travel is now affordable for many more sole proprietorships and small to medium-sized businesses.

This article introduces some of the tax, financial, operational and regulatory issues involved in acquiring and operating a business aircraft. It is intended primarily for CPAs advising clients or employers who are aircraft owners or who are interested in purchasing a business aircraft.

A Caveat and the Case Study Introduction

The acquisition and operation of a business aircraft can be divided into distinct phases, including preacquisition planning, acquisition, delivery and operation

The Preacquisition Phase

The first step in the preacquision phase is to document why Greenacre needs its own plane following the ordinary, necessary and reasonableness issues of IRC section 162 and the regulations, cases and other citable authority

The Acquisition

Greenacre decides to purchase a jet in the $5 million to $10 million range and enters into purchase negotiations. It's also time for Greenacre to get its financing in order. Acquisition consultants can help here as they typically have several financing sources

Aircraft Delivery

Each state has its own sales and use tax laws — especially for aircraft. The taxes imposed on aircraft purchases may be

Depreciation

Since Greenacre LLC will use the plane only for its own business and not make it available for public charter, its operation falls under Federal Aviation Regulation 14 CFR part 91. The appropriate asset depreciation class is

Tax Law Changes for Personal Use

This section provides basic guidance in an extremely complex area resulting from the American Jobs Creation Act of 2004 and IRS Notice 2005-45. Any CPA who gives advice in this area should be thoroughly familiar with the client or employer's facts and circumstances as well as these two pronouncements

Ready For Takeoff, Facts and Figures, and Practical Tips

With a seat on a new VLJ aircraft expected to cost about the same as a fully refundable coach ticket--without the problems of long security lines, lost baggage, missed connections and the like