buying an airplane

NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses the futile search you may face when buying an airplane.

You are pre-approved for a loan, have a hangar secured, and now all you need is the turboprop of your dreams. You know exactly what you want. The only problem is there don’t seem to be any on the market, or at least at what you think is a reasonable price.

This is where a broker or dealer that specializes in the particular make and model your looking to purchase can be of tremendous value. Let’s say for sake of discussion you’re looking for a TBM 850. A good place to start is your local new TBM dealer. While they may not currently have an 850 available for sale, chances are they’ve sold one and may know someone looking to purchase a new TBM if they could only sell their used one. In the real estate world, agents frequently have so-called “pocket” listings where they have talked with owners who are interested in selling someday and the aircraft world is no different. Their property may not be listed on the market. If you choose an aircraft that is in high demand, it is not unusual for a broker to know about an aircraft that is not for sale…yet.

Should that approach fail, take a look at your search. What is it about your dream plane that is limiting your results? Do you need to shop for similar aircraft that nearly match, but not exactly match, your ideal model?

Here’s the good news. In general, there is enough of an aircraft inventory out there that, unless you are looking for something really unique, you should be able to find what you want. If not, there is still a final plan. Find someone who has what you want but has no intention to sell, and make a generous offer, you may be surprised.

Doing so may necessitate an appraisal to justify the value of the aircraft, however, even if the appraisal comes in less than what you’re paying, most lenders are still more than willing to provide a loan. Virtually all lenders lend on the lesser of a loan to value or loan to purchase amount. You may just need to put a little more down than you were originally planning.

When the buying fever strikes, AOPA Aviation Finance is here to help you find the lender that is right for your specific purchase.

Considering aircraft ownership? AOPA Aviation Finance will make your purchase experience as smooth as possible. For information about aircraft financing, please visit the website (www.aopafinance.com) or call 1-800-62-PLANE (75263). 

This article was originally published by AOPA Aviation Finance on January 4, 2019.

By Qingqing Miao and David D. Warner with Lane Powell a law firm in Seattle, WA.  

On December 20, the Congress passed the Tax Cuts and Jobs Act (the “Tax Act”), a $1.5 trillion tax package that cuts individual income tax rates for eight years and reduces top corporate tax rate to 21 percent permanently.  The bill is now awaiting President Trump’s (fully expected) signature.

The Tax Act contains major provisions that affect business aviation.  Here are a few major highlights:

1. Elimination of Like-Kind Exchanges 

One of the most recognizable changes is that the Tax Act eliminates the ability to use the “like-kind exchange” (commonly short-handed to “LKE”) under Section 1031 of the Internal Revenue Code (“Section 1031”) in aircraft transactions. 

Current Section 1031 allows taxpayers to defer any gain on the sale of an aircraft, if that aircraft is held for productive use in a trade or business or for investment, and if it is exchanged solely for another aircraft of a like kind that is also held for productive use in a trade or business or for investment. 

The Tax Act, however, will only allow like-kind exchange for real property.  This means that aircraft owners would no longer be able to rely on Section 1031 to defer any taxable gain on the sale of their aircraft when they upgrade.  Instead, aircraft owners will pay income tax — at “ordinary income” rates — on any gains realized on the sale of their aircraft even if the taxpayer replaces that aircraft.

Nevertheless, Aircraft owners who either disposed of the relinquished property or acquired an upgrade property on or before December 31, 2017 may still take advantage of the current Section 1031 rule pursuant to a transition rule provided by the Tax Act. 

1. Bonus Depreciation

The Tax Act provides for 100 percent expensing, allowing immediate write off of the entire cost of property placed in service after September 27, 2017 and before January 1, 2023 (commonly known as “bonus depreciation”).  Currently, the law allows for 50 percent bonus depreciation for qualified properties (among other things, only newly manufactured aircraft qualify).  

This new bonus depreciation rule could significantly alleviate the negative impact on business aircraft buyers caused by the elimination of LKEs for aircraft.  Buyers of both new and pre-owned business aircrafts are eligible for this bonus depreciation rule as long as it is the buyer’s first use of the acquired aircraft. 

From January 1, 2023 through December 31, 2026, the Tax Act provides for a phase down of bonus depreciation in increments of 20 percent each year for qualified business aircraft acquired and placed in service during that period.  For properties with longer production periods, including certain aircrafts, the last day is December 31, 2027. 

1. No Deduction for Transportation and Commuting Benefits

The Tax Act does not allow deductions for any expense incurred for providing any transportation, or any payment or reimbursement to an employee in connection with travel between the employee’s residence and place of employment, unless it is necessary to ensure employee safety.  It is not clear whether commuting expenses included in income may be deductible under this new provision.   

1. Disallowance of All Entertainment Expenditures

Currently, Section 274 of the IRC does not allow deductions of entertainment expenses unless they are directly related to or associated with the active conduct of business.  The Tax Act changes this long-standing rule by disallowing deduction of all entertainment expenses, regardless of their connection to the tax payer’s business activities.

1. Ticket Tax Does Not Apply to Owner Flights on Managed Aircraft

The Tax Act amended Section 4261 of the IRC to provide that owner flights on managed aircrafts are not subject to Federal Transportation Excise Tax (FET) as imposed by Section 4261 and Section 4271.  Instead, they are subject to the non-commercial fuel tax.  This added provision confirms that the law is consistent with the common understanding in the business aviation industry.

Payments by the aircraft owner (or lessee of a qualified lease) for aircraft management services related to maintenance, support or flights on the aircraft are not subject to the FET.  The owner or lessee does not need to be on the flight as long as the owner (or lessee of a qualified lease) pays for the aircraft management services.  The term “aircraft management services” is defined broadly under this new provision.    Lessees who lease an aircraft from a management company or person providing aircraft management services for a term of 31 days or less do not qualify as “lessee” for purpose of the FET exception.   

Note that the FET exception only applies for flights paid by the owner or lessee.  Therefore, if an owner leases the aircraft to a management company and an affiliate of this owner pays for the flight, the exception may not apply.