Aircraft Acquisition Teams: The Tax Advisor

Aviation tax advisors assist aircraft owners in many ways, including achieving a regulatory compliant structure and helping the owner meet their tax goals. They provide a focus on the need for cash-flow efficiency, and, when it comes to buying an aircraft, will provide guidance on how to complete the transaction in the most tax-efficient way.

There are many gray areas that exist between regulatory bodies and tax requirements, which can prove to be something of a minefield for aircraft owners. A good tax advisor can help to defuse these areas, mitigating the risks and protecting their clients from unintended exposure and incremental costs.

The key goal of an aviation tax advisor is to maximize tax benefits of aircraft ownership while creating aircraft ownership solutions that meet with regulatory oversight and IRS compliance while also meeting their client’s specific aircraft ownership needs.

By analyzing an aircraft owner’s current and future business goals, and their income and tax situation, a tax advisor can ensure the aircraft ownership experience is a beneficial one for their client.

The aviation tax advisor will consider IRS and FAA regulatory frameworks and how they will:

• Impact tax planning strategies.
• Know the differences between FAR Part 91 and 135 operations from a taxation perspective.
• Advise on ownership issues such as flight sharing, leasing structures and shared ownership.

In addition to assisting with establishing the operating structure for the business jet, tax advisors can assist in federal and state tax returns, structure aircraft purchases and sales, and help buyers and sellers plan around sales and use taxes that can vary from state to state, and from one nation to another.

Aircraft and Business Ownership Structures

If you’re planning to buy a business jet, depending on your business goals different corporate structures can be set up to minimize certain risks. As an example, a Special Purpose Entity (SPE) is a corporate structure allowing a parent company to isolate risk associated with aircraft ownership.

An SPE, created as a separate legal entity by a parent company for a business transaction, has its own legal structure, assets, liabilities, tax treatment and balance sheet, allowing a corporation or individual to carry out specific activities such as buying and operating a business jet.

From a tax-saving or tax exemption perspective, a key benefit of establishing an SPE may be to do so in a low tax or tax-free location.

However, owning and operating an aircraft through an SPE also brings its own rules and limitations on how the asset may be operated – and an aviation tax advisor will provide direction as to how such an entity should be structured, or whether another solution would be preferable considering the aircraft buyer’s intended use of the aircraft.

Flight Sharing, Leasing Structures & Shared Ownership

When you’re planning to buy an aircraft, depending on how you intend to use the jet it is important to analyze and understand the various gray areas and tax concerns relating to shared and joint use of an aircraft.

You will need to analyze the differences between FAR Part 91 and Part 135, and the relationship between IRS and FAA regulatory frameworks and what the impact on tax planning strategies might be.

Part 135 operations could change the picture entirely when it comes to tax benefits, so, for example, if you plan to defray some of the fixed costs of operating your aircraft with charter revenue, your tax expert will be key to helping you plan the number of charter hours it would be beneficial to allow for charter use annually.

Similarly, if you plan to lease an aircraft, different leasing structures pose different considerations regarding FAA and IRS regulations, especially when taxation and operational control are being considered for both the lessee and lessor.

As an example, a capital lease has the economic characteristics of asset ownership for accounting purposes, and so the lessee can take advantage of the tax benefits. Under an operating lease, however, the lessor is the one that takes advantage of the tax benefits associated with ownership.

A synthetic lease, on the other hand, is an operating lease for accounting purposes and a capital lease for tax purposes, allowing the lessee to take advantage of tax benefits while the lessor remains the owner for accounting purposes. A tax advisor will be of huge benefit to clarify such matters.

Understanding Aircraft Tax Depreciation

For those planning to buy a business jet, tax depreciation is likely to be a part of the planning process – whether that’s how to take advantage of bonus depreciation, or another (less favorable) depreciation schedule where the buyer doesn’t qualify for bonus depreciation.

Tax depreciation is essentially used to recover a portion of the asset’s cost through tax breaks during a stipulated recovery period.

As an aircraft declines in value, depreciating an asset helps the owner subtract the inherent reduced value during an asset’s usable lifetime.  

However, if the owner wishes to optimize tax deductions from depreciation, a clear understanding of the subject, the regulatory environment, and the available depreciation methods are needed, and the advice of a Business Aviation tax specialist should be sought.

Effective planning and guidance to secure business aircraft tax depreciation deductions requires detailed analysis, factoring the proposed business aircraft ownership structure. It is vital for aircraft owners to understand what the limitations on claiming depreciation deductions are.

In Summary

As established in the preceding paragraphs, it’s important to seek legal advice and tax counsel to understand multiple areas of buying and operating an aircraft that will have an impact on the tax you pay. A tax advisor will help ensure you avoid paying unnecessary tax buying, operating, and eventually selling your aircraft in the most tax-efficient way.

It should be clear that doing your homework (or preferably having a qualified aviation tax expert do it for you) is essential if you wish to optimize a tax claim through your aircraft acquisition. Getting the right professional for your aircraft acquisition team is vital!