NAFA Administrator posted an articleNAFA member, Adam Meredith, discusses the hidden or unexpected costs of aircraft ownership. see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses the hidden or unexpected costs of aircraft ownership.
Major hidden costs, for example, can result when a previous owner has deferred maintenance. You’re better off buying an airplane that’s been regularly used because the owner will typically address issues as they arise in order to continue using the plane regularly.
It’s a myth that it’s smart to look for an aircraft that’s had low flying time. Less wear and tear on the engine and the airframe? While those are important considerations, they should not be the only ones. After all, these are machines and machines are made to be run. When an aircraft sits, its problems remain hidden.
Low flying time could mean high maintenance when it’s your time to own the airplane. That’s one reason the first annual inspection can be unusually expensive — another hidden cost. So be prepared.
Here is a list of other hidden costs associated with aircraft ownership:
- Expenses incurred when an airplane is tied down outside (as opposed to protected in a hangar), including repainting and reskinning the exterior and replacing or repairing instrument panels, aircraft seats, interiors or even sun-crazed windows.
- Contaminated fuel, or more likely, a lineman who accidentally fills your gas tanks with the wrong fuel.
- Unforeseen mechanical failures or mishaps, such as a blown tire, a gear door jamming, a baggage door opening in flight and ejecting an object that damages an elevator or tail surface, etc.
- Compliance with unforeseen airworthiness directives (ADs).
- Animal strikes, bird strikes, lightning strikes, prop strikes, strikes by another aircraft taxiing into you.
- Mud daubers corrupting your pitot-static system or rodents chewing through electrical cables or nesting in your push-pull tubes.
- Sudden failure of one or more instruments, navigation radios or engine monitors.
- Even a pandemic.
The list is extensive but not exhaustive. Hence our advice to add 10% to 15% on top of your projected operations budget, so when those hidden costs reveal themselves, you aren’t surprised.
This article was originally published by AOPA Aviation Finance Company on June 10, 2020.
Tracey Cheek posted an articleThe FAA and aircraft ownership - use a trusted, neutral third party to handle transactions. see more
By Wright Brothers Aircraft Title
Not necessarily. Here’s why.
Philko Aviation, Inc. v. Shacket
United States Supreme Court 462 U.S. 406 (1983)
This is a great example of aircraft ownership and the role of the FAA in sales transactions. In this case, a shady character, Roger Smith, sold an aircraft to the Shackets. Smith provided the aircraft and a photocopy of the bill of sale and told Shacket that he would take care of the paperwork. He never filed the bill of sale with the FAA, so there was no record the transaction ever happened. Shady Smith then resold the same aircraft to Philko Aviation. He told Philko that the plane was in Michigan but provided them with the title documents. Because he provided a bill of sale and there was no record at the FAA of Shacket sale, Philko’s bank closed the deal and filed the bill of sale with the FAA.
So, both parties paid for the plane, but Shacket had the aircraft and Philko had the title. Who really owned it?
The Shackets sued in federal court for ownership of the aircraft. Philko claimed that they had the right to the aircraft because the Shackets did not file any title documents with the FAA (as required by § 503(c) of the Federal Aviation Act of 1958. 49 U.S.C. §§ 1301 et. seq). Obviously, both parties felt they had a right to own the plane. After all, they both paid for it, right?
The court ruled in favor of the Shackets. The reason? The Shackets had a good title under Illinois’ Uniform Commercial Code, which was NOT preempted by the Federal law § 503(c). The law stated that an oral sale is valid against third parties once the buyer takes possession of the aircraft.
The FAA and Aircraft Ownership
What is interesting and notable about this case is the party who held title according to the FAA records was not the party who won the case. In other words, the FAA said that Philko owned the plane, but the courts disagreed and gave the plane to the Shackets because they were in possession of it. Philko Aviation did the right thing by filing with the FAA, but that was not the deciding factor. Possession is 9/10ths of the law, and this case was no different. The party in possession won.
What can we learn from this? Be careful who you deal with. The global nature of aircraft transactions makes it hard for buyers and sellers to know each other. In a previous blog, Born in a Pool Hall, we outline the origins and reasons for using a trusted escrow agent. In this instance, having used a trusted, neutral third party to handle funds and documents would have saved both parties a lot of time, energy, and heartache.
Tracey Cheek posted an articleCan a prospective aircraft owner benefit from claiming 100 percent "bonus depreciation"? see more
Can a prospective aircraft owner benefit from claiming 100 percent “bonus depreciation” even though the owner expects to fly the aircraft for personal use? Yes, with limitations and careful structuring under the Internal Revenue Code (IRC). However, in doing so, it is essential to harmonize potentially conflicting rules in the IRC with the Federal Aviation Regulations (FARs) and state law, including sales/use tax laws.
The Tax Cuts and Jobs Act of 2017, which became law on December 22, for the first time allows aircraft owners temporarily to take 50 percent or 100 percent bonus depreciation deductions on preowned aircraft. It also doubles the pre-existing 50 percent bonus depreciation to 100 percent of the cost of certain new aircraft.
A business taxpayer who owns an aircraft can take 100-percent bonus depreciation deductions under the IRC against gross income if it uses the aircraft in its trade or business or for production of income. However, an owner cannot take depreciation deductions for personal use, including entertainment, amusement, or recreation.
The IRC allows certain owners to deduct depreciation from gross income by two methods. The first is straight-line depreciation created under the Alternative Depreciation System. This allows owners to take equal depreciation deductions each year of the “recovery period”—the years to fully write off aircraft. That is six years for aircraft operated under Part 91 and 12 years for aircraft operating under Part 135.
Read the full article on AINsight.