The business aviation industry has matured. The first business jets from the early 1960s are rapidly approaching their fiftieth birthday. If you apply the airline rule-of-thumb for determining an aircraft’s age in human terms- with modification (from three human years for every calendar year- down to two human years per)- the first generation business aircraft fleet are now almost one hundred years old. Airbus is actively ...
Charitable Tax Deductions: An exit strategy less followed.
The business aviation industry has matured. The first business jets from the early 1960s are rapidly approaching their fiftieth birthday. If you apply the airline rule-of-thumb for determining an aircraft’s age in human terms- with modification (from three human years for every calendar year- down to two human years per)- the first generation business aircraft fleet are now almost one hundred years old.
Airbus is actively addressing the issue of age decommissioning of aircraft with their Process for Advanced Management of End of Life Aircraft (PAMELA) initiative - however the business aircraft OEMs have yet to develop a similar program. Regardless of how old an aircraft is- eventually the owner will wish to exercise an exit strategy. The Internal Revenue Service (IRS) in the United States allows aircraft owners to defer capital gains taxation through the 1031 Like-Kind Exchange Program (US Federal Tax Code 1031)- as long as the owner continues to trade from one aircraft into another. The qualifying factor required is the replacement aircraft must be held for investment or used in trade or business in which the owner is engaged. Eventually this system of tax deferment ends- when the owner decides to get out of the business of owning an aircraft. Then it is time to ‘pay up and look big’- especially if you are ending a series of various aircraft that you have owned and used in your business spanning multiple years - the Tax Recapture after Depreciation may well amount to a very significant amount of money.
If it is time for you to develop a suitable exit strategy- you might consider the benefit of receiving a Charitable Tax Deduction from the IRS through the donation of your aircraft to a worthy cause (see the brief regarding Wings of Hope- as a suggestion at the end of this article).
In some business circles- a charitable donation is viewed negatively. An example of this is when a client of mine recently asked me why anyone would throw money away by donating to a charity. The way he sees it- any charitable donation is a waste of his money- when he believes that there are other ways of avoiding taxation. I was actually quite mortified by this attitude- and even though I am no chartered accountant or C.P.A.- I felt that it was important for me to fully understand the donation issue- hence the penning of this article.
What happens to the aircraft?
First- let’s understand what happens to your donated aircraft- after you have signed it over to your chosen charity. Unless the charity uses the aircraft- it will be converted to cash through resale- as quickly as possible. It is in both of your interests (you and the charity) to see that the aircraft sells for the highest possible amount- because the amount that they sell it for- will be the amount that they report to the IRS; and ultimately that amount will be allowed for your tax deduction. Unfortunately this is where the biggest problem lays with any non-cash charitable donation above $500.00 US Dollars.
Often the pecuniary amount that you expect to get as a tax deduction- may be less than the aircraft’s selling price due to true-market conditions that exist at the time of the sale. Or your expectations may be unrealistic. The IRS requires that a qualified appraiser independent of both the philanthropist and the recipient must determine and report what the Fair Market Value (FMV) of the aircraft is.
If the recipient charity cannot retain your donated aircraft for three years – or pass it along to another qualified charity – your tax deduction will be the lesser of two numbers: The figure arrived at by the independent appraiser and the actual selling price the charity receives. The appraiser will have issued an IRS 8283 form- which is also signed by the charity. When the charity sells your plane- it will also report it to the IRS on form 1098C- which you will receive a copy of. Whichever figure is less- that becomes your tax deduction.
Since often the selling price is less than the appraised value- regardless of reason- you can become embroiled in a dispute over owed taxes and fees. Obviously- it behoves you to ensure the charity will not sell your plane within three years and retains it for use.
This may not be anyone’s fault as market conditions and situations with aircraft change very dynamically. For example: If the aircraft experiences a significant negative event after your donation then you may have room to argue that the higher appraised value can be used- if the event was truly major and not in existence at the time of donation.
The bottom line- however- is that it is still possible to avoid falling foul of the inevitable diminished deduction amount that drastically contradicts the amount that you claimed- as long as the donated aircraft is not sold within three years after you donated it. The ‘period of prescription’ on real property donations is effectively three years- but the true-legal ‘statute of limitations’ is still ten years - so be warned.
Selecting the organization
Before you can proceed with your magnanimous philanthropic act you must first select the organization that best suits your ideals and beliefs. The IRS specifies that a donation is deductible only if it is contributed to a registered tax-exempt organization that is incorporated under Internal Revenue Code section 501(c)(3) and has been issued a Letter from the IRS (the Determination Letter).
Tax Publication 78- which can be downloaded from the IRS website lists all such organizations. Additionally there are subordinate organizations that are covered by a Group Exemption; Governmental Units including Indian Tribal Governments (see Sections 170(c)(1) and Section 7871(a)(1)(A)- along with other organizations that are deemed Tax Exempt- but are not listed in Tax Publication 78. When in doubt about the Exemption Status of an organization it is best to call the IRS at +1 877 829 5500.
Now that you have selected your recipient organization- have qualified them- and have arranged for the transaction to occur- you are three steps away from completion. Next a suitably qualified appraiser who is acceptable to the IRS must be selected and commissioned to perform the FMV appraisal. You may arrange for this and pay for the service- but the cost of the service cannot be rolled into your donation-tax-deduction (you can- however- ask the charity to pay for it).
Instead it must be kept separate and used in your normal itemized tax return as a business expense. Normally most charities have a regular arrangement with specific appraisers that are familiar with the types of property that are regularly donated to them. Once you have the IRS 8283- signed by both the Appraiser and the Charity- you will attach it to your normal Tax Return at your next filing. All that remains for you to do now is complete an FAA Bill of Sale Form- number 8050-2 in duplicate and original (available for download at the FAA website). That form is given to the charity and it processes the form with new registration forms to become the owner of the aircraft.
You should retrieve your Registration Certificate- which is kept in the aircraft and fill out the back of it- returning it to the FAA at the address shown.
Of course- if your aircraft is subject to an International Registry Filing under the Capetown Convention Treaty- you will also have to affect the proper filing with them too. For this- I suggest that you utilize the services of a recognized Escrow and Title Company in Oklahoma City. You may find a list of these in a downloadable document at the FAA’s website at the Registry page. This document is listed as form AFS-750-55 and is titled ‘List of Title Search Companies.’
All that remains for you then is to pat yourself on the back for a job well done - congratulations are now in order!