Building Your Aircraft Acquisition Team: The Tax Advisor

Aviation tax advisors assist aircraft owners in many ways, including helping them meet their tax goals and achieve a regulatory-compliant aircraft ownership structure.

Truth be told, there are many gray areas relating to tax requirements and aircraft ownership which an experienced, specialized aviation tax advisor should help shed light on. They can mitigate any unseen risks for buyers of aircraft, protecting them from unintended exposure and incremental costs.

The key goal for aircraft buyers is to source an aviation tax specialist who can maximize the tax benefits of aircraft ownership while creating the most tax-efficient, IRS-compliant structure.

Experienced aviation tax advisors provide specific aviation knowledge beyond that of a more general business accounting and tax advisory service. By analyzing an aircraft buyer’s current and future business goals, income and tax situation, an aviation tax advisor can create an ownership structure tailored to the buyer’s specific needs.

Should a buyer wish, for example, to make their aircraft available for charter some of the time to help defray some of the operating costs, the aviation tax specialist can advise on the differences between FAR Part 91 and Part 135 operations from a taxation viewpoint, or for other ownership scenarios such as flight sharing, leasing structures and shared ownership (see below).

Moreover, tax advisors can assist buyers with federal and state tax returns, helping structure aircraft purchases and sales appropriately and legally.

Tax Advisors and Business Ownership Structures

Based on your business goals, different corporate structures may be set up to help minimize certain risk.

For example, a Special Purpose Vehicle (SPV) is a corporate structure allowing a parent company to isolate risk by legally separating assets or entities. SPVs – also known as Special Purpose Entities – are separate legal entities created by a parent company for a business transaction.

They have their own legal structure, assets, liabilities, tax treatment and balance sheet, and allow a corporation or a High-Net-Worth Individual to carry out specific activities, such as buying and operating a business jet.

From a tax saving or tax exemption perspective, one of the key benefits of setting up an SPV is to do so in a location with a favorable taxation structure.

Tax Depreciation in Business Aviation

When a business aircraft is purchased, depreciation is often used to recover a portion of the asset’s cost via tax breaks during a stipulated recovery period. Thus, as an aircraft declines in value, tax depreciation helps its owner to subtract the inherent reduced value during an asset’s usable lifetime.

If you decide to optimize tax deductions through depreciation, a clear understanding of the regulatory environment and the available depreciation methods are needed, as well as the rules that could disqualify you from depreciating your aircraft (e.g. personal use of the aircraft). 

Obviously, the advice of a Business Aviation tax specialist should always be sought regarding your intended use of the aircraft.

Bonus depreciation within the Business Aviation sector is designed to stimulate aircraft sales while simultaneously supporting economic growth, including providing long-term stimuli to the industry.

Applicable to US aircraft buyers only, bonus depreciation currently allows for 60% of an aircraft’s value to be depreciated, providing it is purchased and placed in service before January 1, 2025. However, there is a strong likelihood that we will soon see a return of 100% bonus depreciation.

Flight Sharing, Leasing, Shared Ownership and Tax

For some aircraft buyers, it will be important to analyze and understand the various gray areas relating to shared and joint ownership of aircraft.

For example, buyers planning on making their aircraft available for charter (Part 135) for some of the time will need to seek expert advice on the differences between FAR Part 91 and 135, IRS and FAA regulatory frameworks, and the impact these will have on their tax planning strategies. 

An aviation tax expert will help you understand the number of charter hours it would be beneficial to allow your aircraft to fly annually.

Those considering leasing an aircraft will find that different structures can bring different tax outcomes, especially when taxation and operational control are considered for both the lessee and lessor.

A capital lease, for example, has the economic characteristics of asset ownership for accounting purposes, so the lessee can enjoy the tax benefits. On the other hand, with an operating lease the lessor is the one who gets to take advantage of the tax benefits associated with ownership.

Yet another scenario is found with a synthetic lease, which is an operating lease for accounting purposes and a capital lease for tax purposes. This allows the lessee to take advantage of the tax benefits while the lessor remains the owner for accounting purposes. A specialist aviation tax advisor will be able to clarify and identify the best lease option for you.

For oversight and tax purposes, aviation regulatory bodies need to be understood while clearly identifying which party (lessor or lessee) has operational control of the aircraft, and the intended type of operation, since different tax treatments and rules apply depending on whether the operation is oriented towards Part 135, Part 91, or both.

Even those considering purchasing a fractional share in an aircraft should seek the advice of a tax specialist too, since they will be considered an aircraft owner for tax purposes.

In Summary

This article is intended as an overview, only. The depth and complexities of aviation tax is far greater than the scope offered here.

Legal advice and tax counsel is essential to aircraft buyers to help them understand separate registration requirements, particularly for low tax, or tax-free offshore locations, as well as to evaluate the pros and cons of different corporate structures and ownership and operating structures.

Tax planning is key for any aircraft purchase as well as understanding the gray areas that could have serious consequences if they’re misunderstood.

It should be clear from the above that doing your own homework and having a qualified aviation tax expert to advise you is essential if you hope to optimize a tax claim through an aircraft acquisition.

Read more articles within this series:
Aircraft Acquisition Teams: The Insurance Broker
Aircraft Acquisition & Sale Teams: Maintenance Specialist
Aircraft Acquisition Teams: The Financier