Taking Flight: Tax Aspects of Aircraft Ownership

By Anvick, Victor C. | Journal of Accountancy, October 2006 | Go to article overview

Taking Flight: Tax Aspects of Aircraft Ownership


Anvick, Victor C., Journal of Accountancy


EXECUTIVE SUMMARY

* 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.

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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

The acquisition and operation of a business aircraft can be divided into distinct phases, including preacquisition planning, acquisition, delivery and operation. Each phase has its own planning opportunities that can offer companies considerable savings--while they still operate within the bounds of regulatory compliance.

If aircraft owners don't address these issues, lost tax deductions, penalties and interest may be the least of their problems. If an accident or other incident occurs, job losses and unnecessary liability exposure far in excess of the enterprise's net worth could result from the failure to follow aircraft regulations.

A CASE STUDY

The only fictional element in the following case study is the name of the entities Greenacre Group and Greenacre Consulting LLC. All other elements are based on actual scenarios accumulated over 20 years of advising clients on the tax, financial and regulatory aspects of aircraft acquisition and operation.

The facts. Greenacre Group is a consortium of privately held entities, linked by common ownership, involved in diverse activities such as real estate, manufacturing and auto dealerships, with locations throughout the Western United States. The group wants to expand into additional markets not conveniently serviced by commercial airlines. It needs to establish firmer control over daily operations, protect its current markets from competition and develop closer relationships with customers, vendors and suppliers. In the event of an emergency, senior management wants to be on-site as soon as possible. Depending on charter or shared aircraft would be too expensive because the group's aircraft use is expected to be well over 200 hours a year. …

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