GKG Law

  • NAFA Administrator posted an article
    Podcast: Drafting Your Team see more

    Listen in as NAFA member, Chris Younger, with GKG Law, talks with Gil Wolin in a recent Business Aviation Advisor "Drafting Your Team" Podcast.

    It’s not your first rodeo. You’ve bought business aircraft before, and now it’s time to make another move. Maybe your travel requirements have changed, the upkeep on your current aircraft has gone through the hangar roof – or today’s financing and tax opportunities are better.

    Or maybe it is your first acquisition. Occasional charter was OK, but your travel schedule now requires immediate access to your own aircraft.

    In both cases, buying the right aircraft at the right price today requires the right knowledge and expertise! In Drafting Your Team, aviation attorney Chris Younger of GKG Law describes what expertise you’ll need to make sure your first – or next – business aircraft acquisition meets your business and personal requirements.

    When there’s more to be said than space and copy deadlines allow, you can rely on the Business Aviation Advisor “Above and Beyond” podcast series to get you the information you need, enabling you to make the most of your aviation investments.

    Click here to listen to the podcast. 

    This podcast was originally published by Business Aviation Advisor on August 23, 2020.

  • NAFA Administrator posted an article
    Webinar: Ready to Buy & Fly? see more

    Educational Webinar Covers Best Practices & Acquisition Strategies Teaming Strategies

    Are you thinking about purchasing an aircraft? It can be an overwhelming experience, especially if you’re a first-time buyer, but there are experienced industry professionals who are ready to help.

    In a free educational webinar on May 28 2020, Essex Aviation President and CEO Lee Rohde joined GKG Law Principal Chris Younger to talk about everything you need to know when it comes to purchasing an aircraft.

    The webinar, Ready to Buy & Fly? Best Practices & Teaming Strategies for a Successful Aircraft Acquisition, includes resources, tips, and information on the following topics:

    • Steps to a successful aircraft transaction (including a week-by-week timeline!)
    • The necessary parties you should include when it comes to purchasing a plane, including:
      • CFO, CEO, and the COO
      • Corporate general counsel
      • An aircraft technical consultant
      • Commercial lender
      • And many more
    • Key closing checklist items
    • Potential post-closing issues
    • Net operating loss (NOL) carrybacks and The Coronavirus Aid, Relief, and Economic Security (CARES) Act

    Essex Aviation handles everything from new and pre-owned aircraft acquisitions to private jet charter counseling and membership. GKG Law works with purchase and sale transactions, aircraft ownership, federal and state tax planning, aircraft ownership trusts, and more.

    To find out more about purchasing an aircraft or to ask our industry experts any questions, contact Essex Aviation today.

    View Webinar Here

    This webinar hosted by Essex Aviation and GKG Law originally aired on May 28, 2020.

     

  • Tracey Cheek posted an article
    Can Your Association Obtain Assistance Under the CARES Act? see more

    NAFA member, Katharine Meyer, with GKG Law, discusses if your association can obtain assistance under the CARES Act.

    On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The legislation included various provisions that assist tax-exempt organizations by providing programs and tax benefits to reduce some of the financial stress created by the COVID-19 pandemic. Unfortunately, one of the most popular parts of the Act, the Paycheck Protection Program (PPP), which makes low-interest loans available to cover payroll costs and then forgives or partially forgives those loans so long as the borrower meets certain requirements, is not available to 501(c)(6) organizations.

    However, the CARES Act still provides assistance to associations. This relief is primarily limited to two categories: emergency lending in the form of Economic Injury Disaster Loans (EIDLs) and refundable payroll tax credits.

    The Economic Injury Disaster Loan and Grant Program

    The Economic Injury Disaster Loan Program (the Program) is a pre-existing Small Business Administration (SBA) loan program that is intended to alleviate economic injury to small businesses or private non-profits experiencing injury. In the past, these loans were commonly used after natural disasters, like Hurricane Sandy. 

    The CARES Act formally declared the COVID-19 pandemic to be a “disaster” under the Small Business Act. This declaration gave small businesses, including private non-profit organizations, the ability to access the Program. Additionally, the CARES Act provided the Program with $10 billion in additional funds to assist small business owners impacted by the outbreak.  

    Under Section 1110 of the CARES Act, private non-profit organizations that were in operation prior to January 31, 2020 are eligible for EIDLs up to $2,000,000, provided the loan proceeds are used for regular expenses, such as payroll and operating expenses, that could have been met but for the COVID-19 pandemic. In order to increase availability of EIDLs, the CARES Act waived certain EIDL Program eligibility requirements. Specifically, a borrower does not have to: (1) provide a personal guarantee for loans up to $200,000; (2) have been in business for at least one year prior to the onset of the disaster; or (3) be unable to obtain credit elsewhere. EIDLs are made directly by the SBA without involving a third-party lender. While these loans are ineligible for forgiveness, loan repayment can be deferred. EIDLs are offered to qualified non-profits at an interest rate of 2.75%.

    One of the most attractive parts of the EIDL Program is the ability to obtain an immediate advance of cash. Private non-profit organizations in need of immediate funds may request a $10,000 emergency cash advance. Such funds shall be provided to them within three days of applying for an EIDL. If the application for the EIDL is denied, the $10,000 cash advance would not need to be repaid. This advance may be used for expenses such as paid sick leave for employees with COVID-19, maintaining payroll during business disruption or government shutdowns, rent or mortgage payments, or increased operational costs.

    For more information, the COVID-19 Economic Injury Disaster Loan Application can be accessed here.

    Employee Retention Credit

    In an effort to encourage employers, including non-profit organizations, to keep employees on their payroll in the wake of the COVID-19 pandemic, the CARES Act included an Employee Retention Credit (ERC). The ERC is a fully refundable tax credit equal to 50% of qualified wages (including allocable qualified plan expenses) that employers pay their employees between March 13, 2020 and December 31, 2020. All tax-exempt organizations are eligible if they were operational during calendar year 2020 and either:

    1. the organization’s operations were fully or partially suspended due to a government order limiting commerce, travel or group meetings due to COVID-19 (such as a ‘stay at home’ order) or
    2. the organization had a reduction in revenue of at least 50% in the first quarter of 2020 compared to the first quarter of 2019. In determining an association’s decline in revenue, the organization must consider its entire operations.

    If these criteria are met, an organization is entitled to a refundable payroll tax credit equal to 50% of qualified wages. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.

    We recommend that you review these options and determine if one or both could be beneficial to your organization.

    For more information on how the CARES Act impacts your organization. Please contact Rich Bar (rbar@gkglaw.com) or Katie Meyer (kmeyer@gkglaw.com).

    This article was originally published by GKG Law on April 6, 2020.

  • Tracey Cheek posted an article
    CARES Act Provisions to Benefit General Aviation see more

    NAFA member, GKG Law, shares CARES Act provisions for General Aviation.

    On March 25, 2020, the Senate passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus bill. The House of Representatives is expected to approve the legislation, and President Trump has indicated he will quickly sign the bill into law. In addition to general loan programs for small and mid-size businesses that are made available, the CARES Act contains provisions that will benefit general aviation specifically. The business aviation community should take note of the following provisions included in the CARES Act:

    • Relief from the 7.5% air transportation federal excise tax for general aviation commercial operations (including flights operated under FAR Part 135), and from the commercial fuel tax through December 31, 2020 (This will not apply to amounts paid for transportation on or before the date of enactment of the CARES Act.);
       
    • Loans and grants to passenger and cargo air carriers, including 
      • $25 billion in direct loans and loan guarantees for FAR Part 135 Operators providing passenger operations and an additional $25 billion for wages, salaries and benefits for employees;
      • $4 billion in direct loans and loan guarantees for FAR Part 135 Operators providing air cargo operations and an additional $4 billion for wages, salaries and benefits for employees;
         
    • $25 billion in loans and loan guarantees for Part 145 maintenance facilities;
       
    • $10 billion for airport grants, with $100 million specifically allocated to general aviation airports.

    Note that companies receiving loan and loan guarantees under the CARES Act will be subject to certain requirements, such as maintaining March 24, 2020 employment levels to the extent practicable through the end of September and limits on employment level cuts, limits on executives’ compensation and stock buybacks, and the Department of Transportation would have authority until March 1, 2022 to order any carrier accepting federal assistance to maintain certain air routes.

    Please do not hesitate to contact a member of our Business Aviation team with your CARES Act questions or concerns in the days to come.

    This article was originally published by GKG Law on March 26, 2020.

  • Tracey Cheek posted an article
    CARES Act Impact on Federal Income Tax Deductions see more

    NAFA member, GKG Law, shares the most recent update on the CARES Act impact on Federal Income Tax Deductions.

    On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus bill passed by Congress. Our previous alert discussed CARES Act provisions that will benefit general aviation. However, the bill also contains several provisions impacting federal income tax deductions. Below are some provisions that may prove particularly helpful to business aircraft owners and operators:

    • Modifications to the Use of Business Losses: 
      • The 2017 Tax Cuts and Jobs Act (TCJA) created limits on the ability for taxpayers to use Net Operating Losses (NOLs). The TCJA eliminated the ability of taxpayers to “carry back” losses to offset income taxes from prior years, and in general limited the “carry forward” use of NOLs to 80% of a taxpayer’s current-year taxable income. The CARES Act allows taxpayers to carry back NOLs from 2018, 2019, and 2020 tax years up to five years. The CARES Act also temporarily allows NOLs to offset up to 100% of current-year taxable income, by removing the limitation that prevents taxpayers from offsetting in excess of 80% of a taxpayer’s current taxable income. Aircraft owners often generate net operating losses in connection with the use and depreciation of their aircraft, so the ability to further utilize these losses could prove helpful to reducing an aircraft owner’s otherwise taxable income.
      • The CARES Act also modifies the excess business loss limitation applicable to noncorporate taxpayers, which limited the ability to offset business losses against other income to $250,000 ($500,000 for married taxpayers filing jointly), by temporarily allowing those business losses to offset up to 100% of other taxable income for the taxpayer’s 2018, 2019, and 2020 tax years. Since aircraft owners often have income from many different sources, this modification may be helpful in allowing aircraft-related losses to be used as an offset against the taxpayer’s income from other sources without the limits in the TCJA.
         
    • Modifications to Limitations on Business Interest Expense Deductions: The amount of business interest expenses that a taxpayer is allowed to deduct is generally limited to 30% of the taxpayer’s adjusted taxable income. The CARES Act increases this limit to 50% for 2019 and 2020 tax years. Aircraft owners frequently finance the purchase of their aircraft, so this provision could allow those owners to deduct additional business interest expenses that would have been nondeductible under the prior rules.

    The tax provisions discussed above are complex in application and often require a holistic look at a taxpayer’s particular facts and circumstances to determine their potential benefit.
     
    Please do not hesitate to contact a member of our Business Aviation team with questions regarding the CARES Act as it relates to your business needs and decisions.

    This article was originally published by GKG Law on March 31, 2020.

  • Tracey Cheek posted an article
    Coronavirus Aid, Relief, and Economic Security (CARES) Act Provisions to Benefit General Aviation see more

    NAFA member, GKG Law, shares the latest on the CARES Act.

    On March 25, 2020, the Senate passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus bill. The House of Representatives is expected to approve the legislation, and President Trump has indicated he will quickly sign the bill into law. In addition to general loan programs for small and mid-size businesses that are made available, the CARES Act contains provisions that will benefit general aviation specifically. The business aviation community should take note of the following provisions included in the CARES Act:

    • Relief from the 7.5% air transportation federal excise tax for general aviation commercial operations (including flights operated under FAR Part 135), and from the commercial fuel tax through December 31, 2020 (This will not apply to amounts paid for transportation on or before the date of enactment of the CARES Act.);
       
    • Loans and grants to passenger and cargo air carriers, including 
      • $25 billion in direct loans and loan guarantees for FAR Part 135 Operators providing passenger operations and an additional $25 billion for wages, salaries and benefits for employees;
      • $4 billion in direct loans and loan guarantees for FAR Part 135 Operators providing air cargo operations and an additional $4 billion for wages, salaries and benefits for employees;
         
    • $25 billion in loans and loan guarantees for Part 145 maintenance facilities;
       
    • $10 billion for airport grants, with $100 million specifically allocated to general aviation airports.

    Note that companies receiving loan and loan guarantees under the CARES Act will be subject to certain requirements, such as maintaining March 24, 2020 employment levels to the extent practicable through the end of September and limits on employment level cuts, limits on executives’ compensation and stock buybacks, and the Department of Transportation would have authority until March 1, 2022 to order any carrier accepting federal assistance to maintain certain air routes.

    Please do not hesitate to contact a member of our Business Aviation team with your CARES Act questions or concerns in the days to come.

    This article was originally published by GKG Law on March 26, 2020.

  • Tracey Cheek posted an article
    Multi-State Aircraft Use Tax: How to Navigate Complexities see more

    NAFA member, Keith Swirsky, President of GKG Law, P.C., discusses how to navigate complexities of multi-state aircraft use tax.

    Given the large amount of money involved with the purchase of corporate aircraft, many aircraft owners are rightfully concerned with sales tax and the complementary use tax. GKG Law’s Keith Swirsky and Ryan Swirsky explore…

    The concerns over sales tax and complementary use tax often prompt aircraft owners to take into consideration ways to minimize or eliminate their tax liability on the purchase.

    Most purchasers are aware that sales tax liability can be incurred based on the location of closing and will plan accordingly. Approaches include:

    • Closing in a state with no sales tax;
    • Closing in a state with an applicable exemption from sales tax for their aircraft;
    • Closing in a low sales tax state (such as the Carolinas);
    • Closing in a state with a fly-away exemption; or
    • Closing in a state where complementary use tax would be owed if sales tax were avoided.

    Strategies for Minimizing Use Tax Liability

    With respect to the latter point, most purchasers are aware that the state where they hangar their aircraft, if different from the state where closing occurred, will be owed use tax on the transaction. Therefore, they will engage aviation tax counsel to implement strategies to minimize or eliminate use tax liability.

    These strategies vary state by state, including the mechanics and requirements of seemingly similar structures. Common tax planning tactics include:

    • Sales for resale;
    • Interstate commerce exemptions;
    • Casual or isolated sale exemptions; and
    • Common carrier exemptions.

    Having planned for sales and use tax based on where the closing for the aircraft occurred and where the aircraft will be based, many aircraft owners believe that their sales and use tax concerns have ended. However, this is not the case.

    Multiple states can assert that complementary use tax is owed, even when such use tax is already being paid to another state!

    Such a situation occurs when another state asserts that it has ‘nexus’ with the aircraft. Many complex issues, often with taxpayer-adverse consequences, can result in such a situation.

    Understanding a State’s Nexus With the Aircraft

    The concept of nexus relates to the level of connection and presence between the taxpayer and the taxing jurisdiction. For a state to impose its sales or use tax, the taxpayer must have sufficient nexus with that state.

    The level of connection and presence required to establish nexus to assert use tax on an aircraft varies state-by-state and, unfortunately for the taxpayer, there is often a lack of clear guidance on what level of contact constitutes sufficient nexus.

    As stated, the hangar location is sufficient to establish nexus. However, it is possible that landings in other states, even infrequently, can create nexus with such states. In this circumstance, other factors are generally required, with factors commonly considered including:

    • Regularity of travel to the state;
    • The total days in the state during a ‘testing period’; and 
    • Whether the taxpayer has other connections to the state (e.g. payroll, property, transactions, tax return filings, etc.).

    Proper advance planning with experienced aviation tax counsel can mitigate such tax risk.

    It is important to note that the ability to mitigate such tax risk will be severely compromised if such planning occurs after the aircraft has been operated, or more commonly, after receipt of a use tax bill from such other state(s).

    What if Additional Use Tax Nexus Can’t be Avoided?

    In the event additional use tax nexus is unavoidable, a taxpayer may be eligible to receive credit for taxes already paid to the original taxing state.

    Generally, states give a credit for ‘like’ or ‘similar’ taxes paid to another state. So, assuming the taxpayer paid, or is paying (if a leasing structure) a meaningful amount of taxes to State A, the challenge is to convince State B that the taxes paid or being paid to State A are ‘like’ or ‘similar’ taxes.

    It is equally important that the aircraft was not used in State B prior to being used in State A, in as much as State B can deny the credit on the basis that State A owes the credit and not State B.

    In Summary…

    While avoiding, or paying sales tax is relatively straightforward, use tax planning is complex and cumbersome. The tax planning intricacies should also factor in a healthy measure of practical guidance.

    Once again, experienced aviation tax counsel should be engaged, in advance of the aircraft purchase. As always, the bigger picture of the flexibility of corporate aircraft utilization is paramount!

    This article was originally published by AvBuyer on July 12, 2019.

     

  • Tracey Cheek posted an article
    Aircraft Management Arrangements and the Flight Department Company Trap see more

    NAFA member, Ryan Swirsky, Associate with GKG Law, discusses aircraft management arrangements and their consequences.

    Aircraft owners frequently arrange for aircraft management companies to provide full-service management of their aircraft for aircraft operations under Federal Aviation Regulations (“FAR”) Part 91. However, when the aircraft management company contracts with the aircraft owner, there is the so-called “Flight Department Company Trap” that can result in serious negative consequences.

    Some background will be helpful.  It is common for a special purpose entity (“SPE”), typically wholly owned by an individual or his or her operating company, to take title to the aircraft.  The aircraft management company usually prepares its management agreement for the SPE to sign.  This commonly occurs because the management company rarely has any information related to ownership structuring issues.

    FAR 91.501(b)(5) allows aircraft operations to be conducted under FAR Part 91 when the carriage of officials, employees, guests, and property of a company on an airplane operated by that company is within the scope of, and incidental to, the business of the company (other than transportation by air) and no charge, assessment, or fee is made for the carriage in excess of the cost of owning, operating, and maintaining the airplane.  This generally means that flights must be in furtherance of a primary business activity of the company.  For example, flying executives of a company that sells widgets to a manufacturing facility where the widgets are made to oversee production would be within the scope of, and incidental to, the primary business of the company.

    Essentially, the Flight Department Company Trap is a situation where the SPE operates its aircraft illegally because stricter FAR are applicable to the SPE’s aircraft operations, but those stricter rules are not followed because the SPE operates the flights solely under FAR Part 91.  The primary activity of an SPE would be transportation by air, as there is no other primary business activity being conducted by the SPE (hence leading to the “Flight Department Company” description).  Therefore, the SPE will be unable to meet the requirements of FAR 91.501(b)(5).  Further, under FAR Part 91, the aircraft operator is not permitted to receive compensation of any kind, except under certain limited exceptions.  Capital contributions by an individual or by his or her operating company to the SPE (which would typically be the only way to fund aircraft operations, as the SPE’s only asset is the aircraft) are deemed to be compensation.

    With the structure where the SPE enters into the management agreement, the Federal Aviation Administration (“FAA”) would likely view the SPE as providing air transportation services for compensation to the owner of the SPE.  The fact that the SPE may be wholly owned by the recipient of such transportation services, or disregarded for federal income tax purposes, is irrelevant.

    Fortunately, aircraft owners can still engage aircraft management companies for assistance operating flights under FAR Part 91 if structured correctly.  Typically, the structure would entail the SPE “dry” leasing the aircraft (i.e. – lease the aircraft without crew) to an individual or his or her operating business, and the individual or business would enter into the aircraft management agreement.  That individual or business would then pay the aircraft management company, and the individual or business would be deemed the operator of those flights by the FAA.  Ideally, the SPE would not be involved in any cashflow with respect to the aircraft operating budget and would instead just have cashflow related income from the dry lease.

    While, from a practical perspective, it may seem like there is not much difference between the two structures (after all, the same ultimate individual or business is flying on the aircraft, and paying the costs for the flights), use of the incorrect structure can result in serious negative consequences.  Those consequences can include violation of insurance policies (and potential denial of coverage by the insurance company in the event of an accident), violation of loan covenants, civil fine exposure by the FAA to the SPE, penalties for the pilots of the aircraft (such as civil fines and license suspension), and federal excise tax liability.  Further, liability protection planning may be potentially undermined due to a piercing of the entity veil argument (due to the principal activity of the SPE being to conduct unlawful aircraft operations).  It is also more likely than not that this structure will undermine typical state sales and use tax planning.

    Aircraft ownership and operation is a complex topic that requires consideration of multiple, often competing, factors.  GKG Law’s business aviation attorneys have marshaled extensive knowledge of federal aviation, tax and regulatory issues, and we are one of the leading practices in the country primarily devoted to business aviation law.  For more information on this topic or other business aviation related needs, please contact Ryan Swirsky (rswirsky@gkglaw.com or 202.342.5282).

    This article was originally published by GKG Law on September 9, 2019.

  • Tracey Cheek posted an article
    Key Factors for Classifying Aircraft Travel for Federal Income Tax Purposes see more

    NAFA member, Ryan Swirsky, Associate with GKG Law, discusses factors for classifying aircraft travel for tax deductions.

    Many aircraft owners use their aircraft for both business and non-business purposes during the same trip.  This practice can often make categorization of a particular trip more difficult, as the “primary purpose” of the trip must be for business in order to be tax deductible. Further, this categorization must be made for each passenger for each leg of a trip. GKG Law would like to remind aircraft owners of the “substantiation requirement” for taxpayers and discuss factors that will cause the Internal Revenue Service (“IRS”) to more heavily scrutinize the classification of a particular trip.  One of these factors happens to be travel around holidays, such as the Fourth of July.

    An aircraft owner is required to make the initial determination of how to categorize its aircraft-related travel for purposes of tax deductibility (e.g., business, entertainment, personal non-entertainment, commuting). However, the aircraft owner must also be able to adequately substantiate with detailed records its classification of the primary purpose of a particular flight in order to support its deductions for the business use of its aircraft. If this requirement is not met, the IRS is able to reclassify the aircraft owner’s initial categorization, thereby potentially disallowing the aircraft owner’s deduction of expenses relating to the flight.

    Certain factors that make a particular trip look more like it was undertaken in connection with entertainment, which would make those expenses non-deductible, can raise “red flags” for an IRS auditor and cause the auditor to scrutinize the trip more closely. As previously mentioned, one such factor is travel around holidays. Other factors include:

    • Travel itineraries that include a weekend (e.g., flying to the destination on a Friday and leaving on a Monday);
    • A longer period of time spent at the destination than is necessary for the business purpose;
    • Travel with multiple passengers of the same last name aboard the flight (e.g., husband/wife, family members);
    • Travel to a “resort type” destination (e.g. – a location known for skiing, golf, or the beach);
    • Travel with many passengers on board a particular flight when it is not clear that all of the passengers are traveling for the business purpose; and
    • Travel where fewer passengers are on the return leg of a round trip, or on later legs of a multi-leg flight.

    Take the recent Fourth of July holiday, for example, where an aircraft owner has a business meeting in Miami, Florida on Friday, July 5th. The aircraft owner flies to Miami on Thursday, July 4th and returns home on Monday, July 8th. In an income tax audit, it is likely that the IRS would scrutinize the business classification of such a flight.  The IRS may recategorize it as a personal entertainment flight unless the aircraft owner can produce adequate documentation to prove otherwise. The aircraft owner will need to produce sufficient documentation, created contemporaneously with the travel (as records created after a tax audit is initiated are usually deemed to be less credible), proving that the primary purpose of the travel was for business. For example, records or correspondences showing that the business meeting was planned before any subsequent entertainment activities were planned would be helpful to show the primary purpose of the trip was business related.

    Categorization of the reason for travel on board a company aircraft is decided on a case-by-case basis using a facts and circumstances analysis. Certain trips can be more difficult to categorize than others or contain taxpayer adverse facts that accompany legitimate business travel. The business aviation tax attorneys at GKG Law regularly advise clients regarding these issues and the types of records that an aircraft owner should keep to maximize the taxpayer’s ability to deduct legitimate aircraft-related business travel expenses. GKG Law also regularly represents aircraft owners in IRS income tax audits involving these issues.  For more information, please contact Ryan Swirsky (rswirsky@gkglaw.com or 202.342.5282).

    This article was originally published by GKG Law on July 9, 2019.

  • Tracey Cheek posted an article
    Navigating Multi-State Aircraft Use Tax Complexities see more

    NAFA members Keith Swirsky and Ryan Swirsky with GKG Law discuss navigating multi-state aircraft use tax complexities.

    Given the large amount of money involved with the purchase of corporate aircraft, many aircraft owners are rightfully concerned with sales tax and the complementary use tax. These concerns often prompt owners to take into consideration ways to minimize or eliminate their tax liability on the purchase.

    Most purchasers are aware that sales tax liability can be incurred based on the location of closing and will plan accordingly. Approaches include to close in a state with no sales tax, in a state with an applicable exemption from sales tax for their aircraft, in a low sales tax state such as the Carolinas, in a state with a fly-away exemption, or in a state where they have determined they would owe the complementary use tax if sales tax was avoided.

    With respect to the latter point, most purchasers are aware that the state where they hanger their aircraft, if different from the state where closing occurred, will be owed use tax on the transaction, and engage aviation tax counsel to implement strategies to minimize or eliminate use tax liability. These strategies vary state by state, including the mechanics and requirements of seemingly similar structures. Common tax planning tactics include sales for resale, interstate commerce exemptions, casual or isolated sale exemptions, and common carrier exemptions.

    Having planned for sales and use tax based on where the closing for the aircraft occurred and where the aircraft will be based, many aircraft owners believe that their sales and use tax concerns have ended. However, this is not the case. Multiple states can assert the complementary use tax is owed, even when such use tax is already being paid to another state! Such a situation occurs when another state asserts that it has “nexus” with the aircraft. Many complex issues, often with taxpayer-adverse consequences, can result in such a situation.

    The concept of nexus relates to the level of connection and presence between the taxpayer and the taxing jurisdiction. In order for a state to impose its sales or use tax, the taxpayer must have sufficient nexus with that state. The level of connection and presence required to establish nexus to assert use tax on an aircraft varies state by state and, unfortunately for the taxpayer, there is often a lack of clear guidance on what level of contact constitutes sufficient nexus. As stated, the hangar location is sufficient to establish nexus. However, it is possible that landings in other states, even infrequently, can create nexus with such states. In this circumstance, other factors are generally required, with factors commonly considered including regularity of travel to the state, the total days in the state during a “testing period,” and whether the taxpayer has other connections to the state (e.g. – payroll, property, transactions, tax return filings, etc.). Proper advance planning with experienced aviation tax counsel can mitigate such tax risk. It is important to note that the ability to mitigate such tax risk will be severely compromised if such planning occurs after the aircraft has been operated, or more commonly, after receipt of a use tax bill from such other state(s).

    In the event additional use tax nexus is unavoidable, a taxpayer may be eligible to receive credit for taxes already paid to the original taxing state. Generally, states give a credit for “like” or “similar” taxes paid to another state. So, assuming that the taxpayer paid, or is paying (if a leasing structure), a meaningful amount of taxes to State A, the challenge is to convince State B that the taxes paid or being paid to State A are “like” or “similar” taxes. It is equally important that the aircraft was not used in State B prior to being used in State A, in as much as State B can deny the credit on the basis that State A owes the credit and not State B.

    While avoiding, or paying, sales tax is relatively straightforward, use tax planning is complex and cumbersome. The tax planning intricacies should also factor in a healthy measure of practical guidance. Once again, experienced aviation tax counsel should be engaged, in advance of the aircraft purchase. As always, the “big picture” of the flexibility of corporate aircraft utilization is paramount!

    For more information on this topic or other business aviation tax issues, please contact Keith Swirsky at 202.342.5251 or kswirsky@gkglaw.com or Ryan Swirsky at 202.342.5282 or rswirsky@gkglaw.com.

    More information on GKG Law's Business Aviation Practice can be found here

    This article was originally published in GKG Law articles on May 9, 2019.

  • Tracey Cheek posted an article
    IRS Record Keeping Requirements - Best Practices for Business Aircraft Owners see more

    NAFA member, Chris Younger, with GKG Law, shares timely tax tips for business aviation owners.

    As the April 15 individual income tax return filing deadline approaches, it is important to think of ongoing requirements regarding recordkeeping to support any business related deductions claimed on your tax return including those relating to aircraft ownership and operations.  As is the case with the governance of any operating business, owners of business aircraft must maintain adequate records to support the deductions claimed with respect to such aircraft. Furthermore, the records must be retained for a sufficient amount of time in the event they are needed in connection with an income tax audit.

    As a general rule, business aircraft owners should retain tax records for a minimum of six years following the date that the owner files the income tax return to which those records relate. Normally, the typical limitations period prohibits the IRS from challenging the contents of a tax return more than three years after it is filed.  However, in certain instances, such as where income is understated by a substantial amount, this time period can be expanded to six years.  There are exceptions to these general rules, such as where a taxpayer engages in fraud or fails to file a tax return. In those situations, there is no applicable statute of limitations. Assuming that those exceptions do not apply, following the general six-year rule should be adequate.

    Additional Rules of Thumb

    In addition to these “rule of thumb” recommendations, business aircraft owners should keep all records relating to an aircraft, including those pertaining to the purchase and sale of the aircraft, until six years after the owner sells or otherwise disposes of the property. The purpose for such retention is to ensure that the owner can support the amount of any gain or loss reported as a result of the sale of its aircraft and any concomitant tax basis adjustments to the aircraft that affect the amount of such gain or loss.

    Business aircraft owners also face certain unique tax record keeping requirements. For example, they must create and retain records relating to SIFL (Standard Industry Fare Level) income inclusion amounts and personal loss deduction limitations. (SIFL is an amount specified by the federal government to determine the value of personal travel on the company aircraft.)

    These records include items that must be created contemporaneously with the flights to which they relate. If a business aircraft owner fails to create such records contemporaneously with the relevant flight, the IRS may have a basis to question or challenge the veracity of the information contained in those records during an audit by, for example, arguing that a business aircraft owner created records merely to support its tax position in an audit.

    Records and Management Companies

    A business aircraft owner should be able to access flight, financial and tax records relating to ownership and operation of its aircraft. If a business aircraft owner hires a management company to maintain certain records (e.g., flight logs, passenger manifests, flight-related activity and maintenance costs), the owner should ensure that its agreement with the management company gives it the right to access these records as necessary even after the termination of the agreement between the owner and management company. Among the recommended provisions to guarantee access to such records would be a covenant by the management company that it will retain those records for an adequate period of time after their creation.

    A business aircraft owner should also ensure that certain records are created in a manner that will enable the owner to effectively utilize them in the event of a tax audit. This is especially true for records that are used as back-up to support SIFL income inclusion amounts and deduction limitations resulting from use of the aircraft for personal purposes and/or entertainment purposes.

    Since the process can be complex, a business aircraft owner should consider retaining a qualified aviation tax consultant who has expertise in collecting and organizing the information needed to correctly calculate these items. Seeking legal counsel regarding record keeping will ensure that an owner of business aircraft is well prepared in the event of an IRS audit of the owner’s tax return.  

    For more information on this topic or other business aviation related tax needs, please contact Chris Younger at cyounger@gkglaw.com.

    This article was originally published by Christopher B. Younger with GKG Law on April 9, 2019.

  • Tracey Cheek posted an article
    GKG Law Successful in Vacating Aircraft Liens see more

    NAFA member, GKG Law, writes about their success in vacating aircraft liens.

    In August 2018, GKG Law reported on the risks posed by service providers filing liens on aircraft for amounts owed for storage, repairs, maintenance or other services relating to an aircraft.  In that article, we noted precautionary measures that can be taken to minimize the risks posed by such liens, and that defenses may exist to such liens.  GKG Law recently was successful in vacating such liens in a case filed in the United States District Court for the Eastern District of Virginia.  In the case, the service provider filed two separate liens with the Federal Aviation Administration (FAA) and with Florida regulatory authorities asserting liens for approximately $450,000.  We were successful in not only having both liens vacated, but our client also was awarded almost $50,000 in damages resulting from the invalid lien filings.  The result highlights the fact that although lien statues may serve a valid purpose, such as ensuring that mechanics and other aircraft service providers are compensated for services they performed at the request of the aircraft owner or operator, aircraft owners are not defenseless when such liens do not have a valid basis or when the lien filings fail to comply with statutory requirements.

    GKG Law’s extensive experience in all aspects of the business aviation marketplace makes it particularly suited to aggressively protect your rights in such commercial disputes.  Please contact Brendan Collins at GKG Law if you would like to discuss any potential aircraft related disputes.  Brendan may be reached by telephone at (202) 342-6793 or by email at bcollins@gkglaw.com

    The original article was published by GKG Law on October 2, 2018.