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Plane Talk MAXIMIZING YOUR INVESTMENT
Need A Deduction? Buy An Airplane
Buying an airplane isn't just about flying your own airplane. If you do it right, it can provide a useful tax benefit as well.
The trick of course is knowing what you're doing. Just buying an airplane doesn't automatically qualify you to deduct it as a business expense, and renting it to your friends doesn't automatically qualify as “business use,” meaning you can write off the operating expenses of the airplane on your personal tax return.
The typical scenario in which most pilots purchase an airplane is to put the airplane in a separate corporation or limited liability corporation (LLC) so that the airplane expenses are not mingled in with personal expenses or expenses from your other businesses.
If you own the airplane with another person or more than one person regularly flies the airplane, a separate company or LLC can provide some liability protection in case of an accident, notes Ray Speciale, a CPA and attorney who teaches at Mount St. Mary's College in Emmitsburg, MD.
But if you are the only pilot who flies the airplane, a separate entity won't protect your assets because the lawyers will go after the pilot of the airplane—you, and not just the owner of the airplane (also you).
Still, putting the airplane under a separate legal entity helps you track your tax burden. According to Lou Meiners Jr., president of Advocate Aircraft Taxation Co., of Naples, Florida, buying an airplane and putting it straight into leasing company will help you avoid paying sales tax.
The leasing company or LLC will be expected to charge use or sales tax on the hourly leasing rate and therefore can avoid paying sales tax at the time the aircraft is purchased.
Once you have the airplane in your hangar, you'll want to keep complete records of all costs associated with the airplane, including maintenance, hangar fees and insurance. There are essentially two ways to consider the operating costs of the airplane.
The first, which is advocated by Speciale, is to distill all of the annual operating costs into a flat hourly rate that you charge yourself for renting the airplane. If you own a business, then the hourly rate you charge yourself for operating the airplane is deducible from your business as an operating expense, Speciale says. The LLC will break even, and you'll be writing off the hourly costs under your other businesses.
Other costs can be deducted as well, including flight training and recurrent training if the training is needed to fly for business. Speciale notes that if you are employed by another company and your employer does not reimburse you for travel in a private airplane, it may lead to problems with the IRS if you try to deduct airplane costs. If your employer won't reimburse you, the IRS might argue that private air travel is not and “ordinary” business expense (or else your employer would have paid for it), and that could lead to a costly tax problem.
Speciale notes that ordinarily, any loss reported by your aircraft LLC or corporation is what's known as a passive loss—meaning it can only be used to off-set other passive losses. In other words, if you have a business and your aircraft LLC lost $2,000 in 2007, you could not use that loss to off-set the income from your business. You would have to factor all of your costs into the hourly rate you charge yourself, and not have a loss.
But Meiners has a different approach, one that lets you combine your aircraft LLC with your other businesses (the source of your “active income”) and effectively use the aircraft losses to off-set your ordinary business income.
This is a very tricky area of the tax law, and one that new owners should definitely get help with.
If it's done correctly, Meiners says you can depreciate the cost of a new or used airplane over five years, essentially giving you a tax writeoff of up to $500,000 in the case of some new, single-engine aircraft, over the course of five years, providing ample tax benefit.
So if you’re thinking of buying an airplane, don’t just consider the cost, factor in the tax benefits ownership provides.
—Sean Fulton
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