Skip to Main Content

tax

  • NAFA Administrator posted an article
    Tax Considerations When Buying a Business Jet see more

    NAFA member, Jet Support Services, Inc. (JSSI), shares what you should know about business jet finances beyond operating costs.

    During the past 18 months, business aviation has changed greatly. Covid-19 shaped the future landscape, while the 2020 U.S. election also led to new rules and regulations for our industry.

    With the much-reported, and welcome influx of first-time business jet buyers since the pandemic, there is much to do to ensure the next generation of jet owners receive the very best tax advice for aircraft ownership and operating costs.

    Read full article and view video here.

    This article was originally published by JSSI on August 30, 2021.

  • NAFA Administrator posted an article
    Important Clarification from the IRS for Owner Flights under Part 135 and its Impact on Aircraft Own see more

    NAFA member, Amanda Applegate, Partner at Aerlex Law Group, shares important IRS information for aircraft owners.

    For every aircraft purchaser, there is a lot of time and thought that should go into the aircraft ownership and operating structure.  Aircraft owners must consider both federal tax regulations and state tax regulations for the state where the aircraft will be based and also states the aircraft will be used frequently. In addition to the tax planning that should occur, there are also significant liability concerns an aircraft owner must take into consideration. Because an aircraft is a flying machine with millions of parts, the liability concerns for an aircraft owner are just as important, if not more so, as the tax planning. This is because when aircraft accidents or incidents occur, the payouts can be considerable and while the amount and type of insurance can reduce the liability concerns, strategic structural considerations can also help. Finally, and equally important to tax and liability considerations, is making sure the aircraft ownership and operating structure is in compliance with the federal aviation regulations (“FARS”), otherwise significant fines can occur or insurance policies can become void.

    As described above, aircraft ownership and operating structure has three important factors: tax, liability and regulatory. Just like a three-legged stool where each leg needs to be the same length, in aircraft ownership and operations planning, each factor must be given equal consideration. If one factor is focused on more than the other you could have an aircraft structure that does not work. For example, if the plan is created to provide a maximum amount of liability protection without understanding the constraints of the FARs, then the ownership and operating structure will likely violate the FARs. All three factors must be considered and often the final ownership and operating structure is a compromise between the three factors. At the end of the day the plan may not be the best plan from a tax or liability stand point but it is a plan that has adequate tax planning and liability protection, while still in compliance with the FARs.

    The recent pre-publication final rule by the United States Internal Revenue Service (“IRS”) on the Tax Cuts and Jobs Act (TCJA) as it relates to aircraft management companies is helpful to owners because the factors do not require as much of a trade-off any longer. The rule states, among many other things, that when an owner flies on its own aircraft under Part 135, that the 7.5% federal excise tax (“FET”) does not apply. The final rule also clarifies that certain common ownership structure planning tools including owner trusts and qualified leases will also not be subject to FET for owner/lessee flown Part 135 flights when on the aircraft owned/leased. This final rule may change the ownership and operating structure plan for new buyers and for current aircraft owners. The rule also confirms that FET is not due on any management fees paid to a management company for its services.

    In the past when an owner elected to fly flights on its own aircraft under Part 91, even when engaging a full-service management company, it did so as part of its ownership and operating structure plan to avoid FET on owner flights. However, it was a trade-off because when an owner flies under Part 91, the owner of the aircraft has operational control and therefore more potential liability. However, now, under the IRS rules, if an owner hires a full-service management company that has a Part 135 certificate, the aircraft owner may elect to have all of its flights flown under Part 135, with the management company in operational control and not have to pay FET. Under the IRS rule, FET is not applicable on owner flights when owner is flying on its own aircraft. The forgoing applies to the aircraft owning entity or another entity that qualifies under the rule, such as a beneficiary under an owner trust or a lessee under a qualified lease.

    With the recent pre-publication final rule by the IRS related to the TCJA as it relates to aircraft management companies, new aircraft purchasers may have to make fewer compromises during its aircraft ownership and operating structure planning. Additionally, current aircraft owners may consider restructuring their ownership and operating structure to take into account the new IRS rules related to FET.

    This article was originally published by Aerlex Law Group on March 2, 2021.

  • NAFA Administrator posted an article
    Final FET Rule a Big Win for Business Aviation see more

    NAFA member Air Law Office, P.A. discusses the latest Federal Excise Tax ruling.

    The IRS has issued its final rule regarding the 7.5% Federal Excise Tax (“FET”) on owner flights.  The issue arose  after the passage of the Tax Cuts and Jobs Act, which left ambiguity on whether FET is due when owners conduct flights on their own aircraft with a management company’s assistance.

    The IRS final rule, which adopted many NBAA-suggested provisions that eliminate potentially confusing language in the proposed rule and provide clear standards for taxpayers and the government.

    Noncitizen Trusts or Owner Trusts have been in the news a lot lately.  Good news for such owners, the final IRS FET rule confirms that owner trust arrangements are covered by the FET exemption.

    Also, the rulemaking abandons a proposal to expand the definition of leases disqualified from the FET exemption, which would have severely limited the exemption’s application to many common aircraft-ownership structures.

    Additionally, the IRS abandoned a complicated allocation method that would have been required when owners take flights on a substitute aircraft and instead clarified that owners qualify for the FET exemption regardless of whether they conduct flights on their own aircraft under Part 91 or Part 135.

    This article was originally published by Air Law Office, P.A. on April 1, 2021.

  • NAFA Administrator posted an article
    Flying Free of Federal Excise Taxes see more

    NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses Federal Excise Tax regulations.

    After years of advocacy by the business aviation industry, the U.S. IRS recently shifted its position on federal excise taxes (FET) largely in favor of aircraft owners.

    Since around 2012, the imposition of FET on private aircraft owners has cut across virtually all management services, including related flights conducted under FAR Parts 135 and 91. The IRS position contradicted the core purpose of levying FET on taxable transportation services by air.

    In this overly broad interpretation, the IRS tried to impose on the amounts paid by the owner for aircraft management activity and related flights on the owner's aircraft.

    FINAL REGS LIFT BURDEN ON AIRCRAFT OWNERS

    On Jan. 14, 2021, the IRS issued the final FET regulations. In a pivot away from its previous policies, the IRS provides greater clarity in, and an expansion of the scope of, the exemption under Internal Revenue Code (IRC) Section 4261. In a win by the business aviation industry, the IRS generally realigned the exemption more closely with its purpose of only imposing FET on taxable transportation by air.

    However, the IRS also embedded some traps and significant limitations in the final FET regulations that require you—as an aircraft owner, a related party to the owner, or an aircraft manager—to scrutinize these regulations and structure the use of the exemption properly in consultation with your tax advisors and aviation lawyer. Importantly, even if you qualify for the exemption, you must also comply with the FARs lest the FAA demonstrates, at your peril, that safety rules its mission, not the final FET regulations or your desire to use the exemption.

    SUMMARY OF FET

    FET is a percentage “ad valorem” tax on the amounts paid for transporting property or “persons,” generally, an individual or entity. FET consists of a tax on air transportation, a fuel tax, or a combination of both. The exemption applies to private aviation, which includes flights operated under Parts 135 and 91, but excludes scheduled passenger service for which tickets (or the like) are sold on a seat-by-seat basis to the general public.

    FET applies regardless of whether the purpose of your transportation is business or pleasure. The domestic FET is 7.5 percent of the “amount paid” (in cash or property) to transport persons plus a domestic segment fee in the U.S. Also, you may pay facility fees for international trips, which differ from the segment fees on domestic flights based on several factors. Neither fee will be charged when the exemption applies.

    To substantiate your qualification for the exemption, you should obtain and keep contemporaneous, “adequate records” of your “aircraft management services,” as well as document the operating and leasing structure explained below.

    FIVE KEY FET QUESTIONS AND ANSWERS

    The following five questions and high altitude answers should help you navigate the final FET regulations:

    What aircraft management services and flights does the exemption cover?

    The exemption appears to apply to almost all maintenance and support of, and flights on, your aircraft. The scope includes flight planning, weather forecasting, fueling, insuring, maintaining, and hangaring/storing your aircraft, paying management fees, and performing such other services necessary to support flights operated by an aircraft owner.

    Who must pay for management services to qualify for the exemption?

    Only an “aircraft owner” qualifies to use the exemption. An “aircraft owner” consists of three narrow classes of interests in aircraft: (1) a holder of legal title to, or holder of “substantial incidents of ownership” in, an aircraft, and (2) a holder of an aircraft lease, namely a lessee, other than a disqualified lease described below.

    Although the final FET regulations do not provide a special definition of a “lease,” they explicitly state that an operating agreement with an owner trustee is a lease between the trustee and the “operator” of the aircraft, typically the owner trust beneficiary. The beneficiary can use or lease the aircraft to another person, including a Part 135 management company, the beneficiary, or other person that qualifies to exercise operational control under the FARs.

    Otherwise, a lease, which includes a sublease, generally refers to a transfer of the right to possession and use of the aircraft for a term in return for consideration. You might think the IRS should recognize every lease and sublease as a lease under the final FET regulations and classify every lessee and sublessee as “aircraft owner,” but neither is the case.

    Instead, the final FET regulations restrict the use of the exemption in at least two significant ways. First, to avoid abuse of the exemption, the IRS excludes any lease between a person, as the lessee, and a management company or related party, as the lessor, with a term of 31 days or less, called a “disqualified lease.” In doing so, the IRS intends to prevent anyone from entering into multiple short-term leases to enable its lessees to use the exemption for daily or occasional flights more akin to chartering an aircraft.

    Second, despite advocacy by the business aviation industry, the IRS refused to allow the use of the exemption by “related parties” such as members of an affiliated group, members of an LLC, disregarded entities, and family members just because of their relationship with the aircraft owner. Rather, the related parties must, like any other person, lease the aircraft to qualify as aircraft owners under the final FET regulations though the result seems inconsistent with practical trip planning of the aircraft owners for their related parties.

    Can one person pay for management services on behalf of another person?

    No person can pay the invoices on behalf of an aircraft owner, other than an agent that pays invoices for the aircraft owner, as the principal. Each aircraft owner must pay the manager directly. Suppose a single-member LLC holds title to the aircraft. A friend cannot pay for the flight of an LLC member even when the member properly leases the aircraft from the LLC in compliance with the final FET regulations.

    Will you lose your right to use the exemption if you allow certain others to lease your aircraft?

    No. If you lease your aircraft to related parties, you will not lose your qualification to claim the exemption yourself. Each lessee will have to evaluate how to use the exemption, including an analysis of a disqualified lease. Managers must also be aware of their obligation to collect FET to avoid the secondary liability for not collecting the FET from the appropriate person. As a planning point, an aircraft owner may pay for an aircraft flight, but the owner does not have to travel on the flight.

    Can you use the exemption on a substitute aircraft?

    No. The exemption does not apply to any substitute aircraft you may use. The exemption does not travel with you; you have to travel on your own aircraft. For example, suppose you fly on a third person’s aircraft provided by your management company while your aircraft is being repaired or is otherwise unavailable. In that case, you will be required to pay FET for the flight as a charter.

    CONCLUSION

    Although the final FET regulations improve the exemption for travel on your own managed aircraft, the IRS may still impose FET if you travel outside the boundaries of the new regulations. And if you fail to comply with the FARs, you may receive a troubling visit from the FAA. Having greater clarity in the final FET regulations is a welcome change, but you may only be able to use the exemption if you plan well ahead of takeoff.

    This article was originally published by AINonline on May 14, 2021.

  • NAFA Administrator posted an article
    Business Aviation Tax - 100% Bonus Depreciation for 2021? see more

    NAFA member, Daniel Cheung, CPA, Aviation Tax Consultants, LLC, shares their 2021 Aviation Tax Legislative Update.

    2021 Legislative Outlook

    Historically, bonus depreciation only applied to factory new aircraft.  This changed with tax reforms of 2017.  Bonus depreciation was increased to 100% in the year of an aircraft acquisition, and it applies to both new and pre-owned business aircraft.  100% bonus depreciation has been a boon to the general aviation industry in the past few years and it continues to be applicable for 2021 acquisitions.

    However, the new administration has promised changes in tax policies.  It is expected that both corporate and individual income tax rates will increase for 2021.  There is no specific discussion of repealing 100% bonus depreciation currently, but as Congress negotiates and finalizes the tax law changes, bonus depreciation may revert back to 50% and applicable to factory new aircraft only.  Tax law changes were not applied retroactively in the past.  Therefore, if your business is considering an aircraft acquisition, you should speed up the process to complete the acquisition under the current applicable laws.

    By Daniel Cheung, CPA, Aviation Tax Consultants, LLC

     

    Audit Risk for Business Aircraft

    “If you write off a business aircraft, that is a huge red flag, and you will be audited by the IRS.”

    In conversations with prospects and CPAs from around the country, I continue to hear this sentiment expressed on a regular basis.  While “to write-off or not” is the big question, here is my response to those hesitant to take advantage of income tax benefits available from a business aircraft:

    Sure, the IRS likes to audit certain tax returns that meet the criteria set forth by the top-secret audit guidelines and algorithm.  However, simply depreciating a business aircraft and deducting the associated aircraft operation expenses do not automatically expose the tax return to an audit.  If such were the case, I would be defending hundreds and hundreds of IRS examinations annually, as every single client we advise does operate and deduct expenses related to a business aircraft.

    Having said that, some reporting scenarios can indeed put a spotlight on  generous aircraft depreciation and deductions. My job as a planning advisor is to ensure that my clients do not utilize such ownership structures and reporting scenarios.  For example, reporting a sizable tax loss on a Schedule C (sole proprietorship) with only the aircraft deductions and depreciation is known to be “red flag”.  On the other hand, aircraft activity and deductions reported within a profitable business income tax return will not draw as much attention from the IRS.

    PASSING THE SMELL TEST

    A business does need justification to write off an aircraft.  A local car dealership or a family practice doctor with only one location or a local clinic will be hard-pressed to prove that a business aircraft can meet the ordinary and necessary standards for business tax deductions.  A multi-state car dealership or a medical group operating a business aircraft to travel between multiple locations, however, will easily pass the justification test.

    In the current pandemic environment, there is an argument made that a business aircraft is becoming a necessity to safely transport employees due to limited airline services and the inherent health risks with airlines travel.

    IF YOU GET AUDITED…

    Many factors will influence the outcome of an IRS audit and how the process plays out.  A young and eager to impress auditor who has little to no prior aircraft audit experience can lead to a difficult audit with many questions, adjustments and disallowance on the initial examination.  Often, the examination will be petitioned to the IRS Appeals Office and a reasonable resolution can be achieved with a more seasoned appeals officer.

    The best defense for an IRS audit is also the simplest – to keep good records.  We emphasize to our clients the importance of having detailed tax flight logs to support the business use of an aircraft.  A well-documented tax flight log will create a positive impression to the auditor who will likely take a less in-depth and less detailed approach to the audit.

    TAX FLIGHT LOG

    Our motto is “there is no such thing as too much documentation.”

    Emails, calendar entries, meeting agendas and other documents and records kept contemporaneously are the most effective supporting documents that should be kept and be available to the IRS auditor.  The tax code requires that passengers be classified based on the reason he or she travels on the company aircraft.  Classifications include business travel, non-deductible entertainment travel, or deductible personal non-entertainment (PNE) travel.

    In closing, a properly crafted business aircraft ownership plan can result in significant income tax savings to the business owner.  Detailed documentation can help a taxpayer prevail in case of an IRS examination.  Business owners should review their operations and seek professional guidance to determine if business aircraft should be utilized to help manage and grow their business.

    This article was originally published by Aviation Tax Consultants and shared by Mente Group on February 25, 2021.

         

  • NAFA Administrator posted an article
    Federal Excise Tax Exemption for Owner Flights see more

    NAFA member, Christopher B. Younger, GKG Law Business Aviation Principal, discusses Federal Excise Tax Exemption for Owner Flights.

    New IRS Proposed Regulations

    History & Current Status Under Newly-Issued Proposed Regulations 

    The Internal Revenue Service (IRS) recently issued a Notice of Proposed Rulemaking containing proposed regulations regarding “Excise Taxes; Transportation of Persons by Air; Transportation of Property by Air; Aircraft Management Services” (Proposed Regulations). The Proposed Regulations address the application of federal air transportation excise taxes (FET) to payments made to aircraft management companies by aircraft owners for the costs of flights on the owners’ aircraft. The Proposed Regulations, if finalized, will provide additional guidance regarding a provision of the Tax Cuts & Jobs Act of 2017 (TCJA), which provides that certain payments by an aircraft owner to an aircraft management company are not subject to FET (TCJA FET Exemption). 

    This article provides an overview of how the IRS has applied FET to payments made by aircraft owners to aircraft management companies in the past. Following this overview, the article analyzes the requirements for the application of the TCJA FET Exemption as further clarified in the Proposed Regulations. 

    FET and Part 91 Managed Aircraft 

    FET is comprised of three elements: a percentage tax (currently 7.5% of the amounts paid); a head tax on domestic flight segments (currently $4.30 per passenger per flight segment); and a head tax on international transportation (currently $18.90 per passenger, except for flights beginning or ending in Alaska or Hawaii where the rate is $9.50 and applies only to departures). 

    FET applies to “taxable transportation” that consists of the provision of air transportation by one person to another person for compensation. This generally includes FAR Part 121 (airline) and FAR Part 135 (charter) flights, but generally does not include FAR Part 91 operations. However, there are certain instances where FAR Part 91 operations are treated as “taxable transportation.” 

    For example, based on prior IRS guidance, a person must have “possession, command, and control” of an aircraft to be considered the provider of taxable transportation for purposes of imposing FET on payments made to such person for such transportation. Consequently, a key issue in prior IRS FET audits of aircraft management companies was whether the aircraft owner or the aircraft management company had possession, command, and control of the aircraft. 

    In April 2008, the IRS published a revised version of its Air Transportation Excise Tax Audit Techniques Guide (the Guide). The Guide was a resource to IRS auditors conducting FET audits and provided IRS interpretations of existing law regarding FET application in specific situations.

    The IRS published the Guide to provide its agents with a compilation of the laws, regulations, judicial opinions and IRS rulings applicable to federal air transportation excise tax. However, specific examples in the Guide were not reflective of “real world” scenarios. The IRS subsequently withdrew the Guide from publication, though it seems that IRS agents continue to rely on it when conducting FET audits. 

    Chapter 5 of the Guide provided that “possession, command, and control” of an aircraft is determined by analyzing: 

    • who chooses and pays for the pilots; 

    • who provides maintenance on the aircraft; 

    • who controls the scheduling of the aircraft; and, 

    • who pays for the insurance and other expenses of the aircraft.

    In March 2012, the IRS published Chief Counsel Memorandum 201210026 (CCM), in which it concluded that control of an aircraft’s pilots was the primary factor in determining which party has possession, command, and control of an aircraft for purposes of imposing FET on payments relating to that aircraft’s operation. Under the facts described in the CCM, the IRS concluded that when an aircraft management company had primary control of the aircraft’s pilots, virtually all fees and reimbursements paid by the owner of an aircraft to its aircraft management company were subject to FET. 

    The IRS’s conclusion in the CCM was not new. However, the CCM provided a more aggressive interpretation of over 50 years of prior published guidance regarding the determination of which party had possession, command, and control of an aircraft. Based on the guidance provided in the CCM, many IRS agents asserted in FET audits of aircraft management companies that FET applied to all payments made by an aircraft owner to its management company since the owner had transferred “possession, command, and control” of its aircraft to the management company. 

    Further adding to the confusion, some IRS agents asserted that, despite the owner’s continued maintenance of operational control of the aircraft for its flights under FAR Part 91, “possession, command, and control” of an aircraft shifted to the management company at all times if the aircraft was on that company’s charter certificate and the contract between the aircraft owner and the management company provided that the owner’s right to unfettered use of its aircraft could be restricted because of a previously scheduled charter. 

    New Law and Proposed Regulations 

    TCJA added the TCJA FET Exemption, which is effective for payments made by an aircraft owner to a management company after December 22, 2017 that are related to maintenance and support of the owner’s aircraft or to flights by the owner on the owner’s aircraft including amounts paid for: 

    • assisting an aircraft owner with administrative and support services, such as scheduling, flight planning, and weather forecasting; 

    • obtaining insurance for a managed aircraft; 

    • maintenance, storage and fueling of aircraft; 

    • hiring, training, and provision of pilots and crew; 

    • establishing and complying with safety standards; and 

    • other services necessary to support flights operated by an aircraft owner. 

    An aircraft lessee is treated as an aircraft owner for purposes of the TCJA FET Exemption unless the aircraft is leased under a disqualified lease. A “disqualified lease” is a lease from a person providing aircraft management services with respect to the aircraft (or from a related person to the person providing the services) if the lease is for a term of 31 days or less. 

    The TCJA FET Exemption applies on a pro rata basis if only a portion of the payment is attributable to aircraft management services. FET must be collected on the portion of payments attributable to flights on aircraft not owned by the aircraft owner. 

    Subsequently, on July 31, 2020, the IRS published the Proposed Regulations. If finalized, the Proposed Regulations would further clarify the scope of the TCJA FET Exemption. Some key takeaways include clarification that: 

    • the “Possession, Command, and Control Test” is not relevant to the application of the TCJA FET Exemption. 

    • choice-of-flight rules (i.e. FAR Part 91 or Part 135) do not affect the application of the TCJA FET Exemption. 

    • whether an aircraft owner permits its aircraft to be used for for-hire flights (i.e. third-party charter) does not affect the application of the TCJA FET Exemption to amounts paid by the aircraft owner for aircraft management services. 

    • the method or manner by which an aircraft owner is billed for aircraft management services (e.g. monthly fees, hourly fees for each hour of flight time, billed at cost plus a mark-up, etc.) does not affect whether the TCJA FET Exemption applies to amounts paid for those services. 

    • payments by certain closely related parties shall not be considered as though made by the aircraft owner for purposes of applying the TCJA FET Exemption. 

    The above takeaways address some of the business aviation industry’s most frequently asked questions regarding the application of the TCJA FET Exemption. Nonetheless, open issues remain that are either not addressed in the Proposed Regulations or that are addressed only in part or incorrectly. 

    The National Air Transportation Association (NATA) and the National Business Aviation Association (NBAA) have jointly prepared and submitted comments to the IRS regarding the most important of these open issues and their recommendations regarding how the IRS should resolve them. That publication is available for download at https://www.nata.aero/pressrelease/ nata-nbaa-seek-clarity-on-excise-tax-exemption-indetailed-comments-to-irs. At this point, the IRS is reviewing all comments and will likely move toward finalizing the Proposed Regulations taking the comments into account (although it is not known with certainty if or when the IRS will issue the final regulations). 

    Conclusion 

    The basic issue of whether FET applies to payments by an aircraft owner to an aircraft management company seems to have been resolved with the enactment of the TCJA FET Exemption. The Proposed Regulations provide much needed additional guidance regarding the scope of the TCJA FET Exemption and its application in the context of specific fact patterns. However, important, but unresolved, issues remain, including those described in the NATA/NBAA comments regarding the Proposed Regulations, which the IRS will hopefully address as it moves toward finalization of those Proposed Regulations.

    This article was originally published in Aviation Business Journal's Fall 2020 issue

  • NAFA Administrator posted an article
    Depreciation and Its Impact see more

    NAFA members, Mente Group's Jeff Dorrough, Accredited Senior Appraiser and Cole White, VP Transactions, discuss depreciation in business aviation.

    In Business Aviation, there are essentially three different types of depreciation that aircraft owners need to be aware of and proactively manage. Each type of depreciation plays a different role in aircraft ownership.  At Mente Group, we take the time to educate our clients on the difference and importance of each. The three types of depreciation are Tax, Book and Market.

    Tax depreciation can be structured using any of the previously approved methods by the IRS. Aircraft owners can select the form of depreciation that aligns best with their needs. One Example of this form of depreciation is the Tax Cuts and Jobs Act passed in December 2017, which allows aircraft owners 100 percent bonus depreciation in year one of ownership. The purpose behind this was to incentivize individuals and business owners to purchase both new and pre-owned aircraft. However, with each administration change, there is risk of change in this policy.  Another approved form of tax depreciation is MACRS (modified accelerated cost recovery system) 5 and 7 depreciation methods which are accelerated methods allowing the capitalized cost of an asset to be recovered over a specified period (5 or 7 years) via annual deductions.  We encourage anyone considering the purchase of a private business jet to take advantage of the “knowns today vs. the unknowns of tomorrow.”

    The second type of depreciation is for internal accounting, known as Book depreciation.  Book depreciation uses the cost of a tangible asset allocated by a company over a stated useful life of the asset.  Traditionally, aircraft are placed on the company’s book at some sort of straight-line method.  The issue we run into many times, is that the Book depreciation percentage applied does not meet the market realities of today. Often, when a company goes to sell their aircraft, the Book Value and Market Value of the aircraft do not match. Majority of the time, the Book Value is too high as compared to Market Value of the aircraft.  This forces the company to take, in some instances, a sizeable write down. In order to mitigate this risk, we work with internal accounting groups to set a more realistic Book depreciation on the front end, thus minimizing risk of the write down on the back end.

    The third type of depreciation is Market depreciation and put simply is spot pricing at any given point in time.  Market depreciation, unlike the previous forms mentioned, are neither prescribed nor predictable.  Market depreciation is greatly affected by macro and micro economic factors such as supply and demand.  Most recently the primary driver to Market depreciation has been associated with the impact from Covid-19 related issues.  Many companies use Market depreciation in conjunction with Book depreciation in which you have your prescribed depreciation being augmented periodically (annually) followed by a mark-to-market adjustment.  This mark-to-market adjustment re-aligns the basis periodically.

    In closing, Mente provides many options to assist owners including counseling, analysis and the Mente MVP platform which optically highlights each of these forms of depreciation in one concise visual.

    This article was originally published by Mente Group on October 21, 2020.

  • NAFA Administrator posted an article
    Bonus Depreciation in a COVID World see more

    NAFA member, Air Law Office, P.A. writes about aircraft depreciation bonus under the 2017 Tax Act.

    The IRS is pretty strict when it comes to 100 Percent Bonus Depreciation under the 2017 Tax Act, especially on the fundamentals.

    • Was your aircraft acquired and placed into service after September 27, 2017 and before January 1, 2027 – this one is fairly straightforward
    • Is your aircraft ‘qualified property’
    • Is your depreciable property of a specific type, including tangible property with a recovery period of 20 years or less, such as commercial and non-commercial aircraft – this one is probably affirmative
    • Was your original use of the aircraft the taxpayer’s use or the aircraft was not used by the taxpayer at any time prior to purchase – this one can be a bit tricky
    • Is your aircraft predominantly used for a qualified business use – this is going to be tough in the time of COVID and if you don’t meet 51% ore more qualified business use then you will need to explore an alternative depreciation system (ex., Five Year MACRS)
    • Is your aircraft used predominantly in the United States – this one can be a bit tricky

    There are, of course other nuances like “under contract” and “alternative deprecation models” and if you use your aircraft significantly for nondeductible entertainment travel (ex., vacation) you may be able to take your depreciation and use disallowance percentages to deprecation on a straight-line basis.

    The Bottom Line:  With face-to-face interaction at an all time low, many owners are in danger of loosing their bonus depreciation benefits.  Check in with your financial and legal teams ASAP, before it is too late to address potential pitfalls!  Remember, this article is intended to inform you about issues that you should discuss with your financial and/or legal team and is not intended as legal advice or opinion, you should not act on any information contained in this (or any other) article without directly consulting legal counsel.

    This article was originally published by Air Law Office, P.A. on August 5, 2020.

  • NAFA Administrator posted an article
    Private Aviation Tax Considerations for Prospective Aircraft Buyers see more

    NAFA member, H. Lee Rohde, III, President & CEO of Essex Aviation Group, Inc., discusses tax considerations when purchasing an aircraft. 

    Acquiring a private aircraft for personal use is an exciting experience, one that opens innumerable doors for frequent travelers — however, to ultimately realize the benefits of your investment, you must first ensure that you’ve fully accounted for all financial considerations, especially aviation taxes.

    Too often, private aircraft owners aren’t fully informed of certain taxes that are involved in the ownership and operation of the aircraft; which are important as it relates to their operating budget and the overall aircraft ownership experience. That’s because tax considerations should be structured not only during the initial transaction, but throughout the ownership lifecycle, and can affect how you decide to utilize your aircraft.

    Read the recommendations below to avoid being blindsided by private aviation taxes.

    Location, Location, Location

    You might be surprised to learn just how many soon-to-be private aircraft owners ignore the opportunity to create even the most basic tax plan in advance of a transaction. Generally speaking, this isn’t for lack of interest but, rather, lack of understanding. Many buyers simply lack the awareness and experience to appreciate how seemingly minor factors, such as the physical location of the aircraft at closing or the location of the hangar where they intend to house their aircraft, can affect taxes.

    For example, some states place a substantial sales tax on aircraft, while others have fly-away exemptions with strict timelines and requirements. Certain states also apply use and property taxes to aircraft purchases or transactions, which can vary and are affected by a number of factors. As federal and state tax laws change over time, working with an experienced aviation advisory team during your transaction will only become more valuable and necessary.

    Plan in Advance

    It’s unreasonable to expect potential buyers to automatically be familiar with state aviation tax regulations and laws, especially as they pertain to private aircraft, which is why it’s important to work with a qualified aircraft consultant and aviation tax advisory firm. Although private aviation consultants aren’t able to provide complete tax advice, they can help you determine the following in advance of your purchase date:

    • What your regular usage will be
    • Where you intend to fly (and for how long)
    • Where you intend to store your aircraft
    • How tax considerations affect your ownership structure
    • How to identify aviation tax counsel

    Your consultant can also act as a liaison between you and the seller, representing you throughout the transaction, as well as managing the process of positioning your aircraft at the right location during the time of closing for tax purposes.

    Consult a Tax Attorney

    In addition to determining your private aircraft usage and handling your acquisition, an aviation consultant can set you up with experienced aviation tax advisors and tax attorneys to round out your team. Aviation tax advisors and tax attorneys are well-versed in aircraft-specific tax codes and have the expertise to identify possible deductions or opportunities to maximize your tax savings by reducing the amount you pay for sales, property and ongoing use taxes. It’s impossible to emphasize enough just how important it is to work with aviation-experienced tax advisors and attorneys — only professionals with extensive industry experience will have the unique knowledge to properly address all of your tax considerations.

    Your private aviation consultant should work closely with your tax team every step of the way. Even if you do your due diligence from a tax perspective, there’s a possibility that, at some point, you’ll be audited. Should this occur, your consultant, tax advisor and aviation attorney will collaborate and help represent you during the audit.

    The right aviation advisory team will consistently go above and beyond for its clients, whether that entails figuring out which private aviation travel option best meets their unique needs, helping them understand how tax considerations affect their cost of ownership and operation, or tirelessly advocating on their behalf. With a collective 70 years of experience in the aviation industry under their belt and a vast network of connections, the consultants at Essex Aviation Group are uniquely qualified to usher clients through every step of the private aircraft acquisition process, as well as put them in touch with some of the best aviation tax advisors and attorneys in the industry.

    This article was originally published by Essex Aviation.  

  • Tracey Cheek posted an article
    Federal Excise Taxes Suspended for Many Business Aviation Operators see more

    NAFA member, NBAA, discusses federal excise tax suspensions for business aviation operators.

    This information is intended to provide members with an introduction to certain provisions of the CARES Act. Readers are cautioned that this information is not intended to provide more than an introduction to the subject matter, and since the materials are necessarily general in nature, they are no substitute for seeking the advice of legal and tax advisors to address your specific business/personal needs.

    The recent suspension of air transportation federal excise taxes (FET) that apply to commercial operations – including Part 135 operators – is an example of NBAA’s round-the-clock efforts to help mitigate the impact of the COVID-19 pandemic on the general aviation industry. As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provides more than $2 trillion of relief to the economy, NBAA played a key role in securing the following excise tax relief provisions included in the legislation:

    • The federal air transportation excise taxes that apply to commercial operations (i.e., Part 135 flights) are suspended effective March 27, 2020, through Jan. 1, 2021.
    • The suspension of taxes is not retroactive and only applies to flights conducted after March 27, 2020.
    • The suspension includes all taxes that a commercial operator normally pays, including the 7.5% tax on amounts paid, applicable domestic and international segment fees and the 4.3 cents per gallon portion of the fuel tax (the 0.1 cents per gallon tax to fund the leaking underground storage tank fund is not included in the suspension).
    • Any business that was collecting or remitting these taxes before is covered by the suspension. For example, if an air charter broker collects and remits these taxes on behalf of an operator, the suspension would apply to them.
    • In addition to Part 135 operations, there are some Part 91 flights that the IRS deems commercial, such as timeshare flights. The suspension would apply to these flights as well.

    In addition, the 6.25% tax on air transportation of property is suspended through Jan. 1, 2021.

    “We urge our members to consult NBAA’s Federal Excise Taxes Guide for more details on how air transportation excise taxes are administered and to check our website frequently for new details as they become available,” said Scott O’Brien, NBAA senior director, government affairs. “While we understand the significant impact that the pandemic has had on operations, we are working relentlessly to make sure that relief for business aviation operators is included in the CARES Act and other economic stimulus efforts.”

    O’Brien noted that NBAA was in the forefront of efforts to secure excise tax relief for general aviation commercial operators, which included a letter to congressional leadership, follow-up with individual U.S. House and Senate offices, and a call to action to affected NBAA members.

    For more information, review NBAA’s coronavirus (COVID-19) resources and federal excise taxes resources.

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

  • Tracey Cheek posted an article
    CARES Act Includes Tax Provisions Affecting Business Aircraft Operators see more

    NAFA member, John B. Hoover, Partner at Holland & Knight, LLP, discusses the CARES Act tax provisions that affect business aircraft operators.

    This information is intended to provide members with an introduction to tax provisions in the CARES Act. Readers are cautioned that this information is not intended to provide more than an introduction to the subject matter, and since the materials are necessarily general in nature, they are no substitute for seeking the advice of legal and tax advisors to address your specific business/personal needs. Download a copy of this article in PDF format.

    The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) was signed into law on March 27, 2020. It includes numerous relief provisions that may benefit companies operating business aircraft. In addition, the CARES Act provides a tax holiday for the remainder of 2020 from the federal excise tax on air transportation and amends several income tax code sections that may affect owners and operators of business aircraft.

    Given the complexity of these tax law amendments, this resource offers only a general description of the amendments. For details regarding the calculations and their application to fiscal years, please refer to the statute.

    Federal Excise Tax (CARES Act § 4007; I.R.C. § 4261)

    The CARES Act provides that the federal excise tax (FET) on air transportation under Internal Revenue Code (I.R.C.) §§ 4261 and 4271 does not apply to amounts paid during the excise tax holiday period from the day after enactment of the CARES Act (i.e., from March 28, 2020) through the end of calendar year 2020. This means that FET does not need to be collected on amounts paid for charter flights, time share flights, or any other flights, irrespective of whether the flights are conducted under FAA Regulations Part 91, 135 or otherwise.

    During this excise tax holiday period, no fuel tax will be required to be collected on jet fuel used for commercial aviation. If fuel tax is collected on kerosene used for commercial aviation, then the purchaser can request a refund of such fuel tax. The foregoing exemption does not apply to the 0.1 cent per gallon Leaking Underground Storage Tank (LUST) tax. This means that only the 0.1 cent LUST tax is ultimately due on fuel purchased for commercial aviation.

    The definition of commercial aviation for tax purposes is generally based on whether air transportation is provided for compensation or hire, and it is not tied to the FAA Regulatory definition. I.R.C. § 4083(b). Accordingly, only the 0.1 cent LUST should ultimately apply to typical charter flights and flights conducted pursuant to a time sharing agreement. However, the full fuel tax amount (21.9 cents or 24.4 cents per gallon) would apply to fuel purchased for use in noncommercial operations such as when a company purchases fuel for use in operating its aircraft for flights conducted for its own business.

    Fuel purchased for fractional program aircraft is subject to the fuel tax on fuel used for noncommercial aviation (21.9 cents or 24.4 cents per gallon) plus a surtax of 14.1 cents per gallon. Since the excise tax holiday does not apply to fuel for noncommercial aviation or the surtax, the fuel taxes paid by fractional program operators would not appear to be affected by the excise tax holiday.

    Limitation on Deduction of Business Interest (CARES Act § 2306; I.R.C. § 163(j))

    Under the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) beginning in 2018, taxpayers’ deductions of business interest expense were limited to 30% of adjusted taxable income (generally net business income). The excess business interest was not deductible and was treated as business interest expense subject to the limitation in the next year.

    Although the deduction limitation applied beginning in 2018, adjusted taxable income is calculated without deducting depreciation in 2018 through 2021. In the case of partnerships and S corporations, the interest deduction limitation was determined at the entity level. The deduction limitation generally did not apply to taxpayers with gross income below $25 million (determined by aggregating income of related entities).

    This limitation is particularly important in the case of business aircraft that are financed. After the three-year grace period during which depreciation is not deducted in calculating adjusted taxable income, this limitation will become even more relevant to business aircraft.

    The CARES Act increases the interest deduction limit from 30% of adjusted taxable income to 50% of adjusted taxable income in 2019 and 2020. This temporary increase in the limitation provides some relief to owners of business aircraft. (Taxpayers can elect out of this increased deduction limit.)

    There is an exception to this temporary relief in the case of partnerships (although not for S corporations). While the 50% limit applies to partnerships in 2020, it does not apply to partnerships in 2019. Instead, a special limitation applies to partnerships in 2019. Under the special rule, the 30% limit applies, and if the partnership has any excess business interest expense, 50% of the excess is allowed as deductible business interest in 2020 (unless the partner elects out of this special rule). The other 50% of excess business interest is carried over like other excess business interest.

    Taxpayers can also elect to use their 2019 adjusted taxable income to calculate their business interest deduction limitation for 2020. This special rule provides some relief for taxpayers whose taxable income decreases in 2020.

    Net Operating Losses (CARES Act § 2303; I.R.C. § 172)

    Owners of business aircraft may incur Net Operating Losses (NOLs), particularly due to large depreciation deductions. Under the TCJA, effective generally with respect to NOLs arising in 2018 or subsequent years, NOLs could only be carried forward (not back) and could be deducted against only 80% of taxable income in future years. Under the CARES Act, these limitations are temporarily relaxed.

    Under the CARES Act, NOL carryforwards can offset 100% of taxable income in 2020 or earlier years. In 2021 and later years, taxpayers can deduct: (1) NOL carryforwards arising in 2017 and earlier years against 100% of their taxable income (because the TCJA 80% limit did not apply to NOLs arising in 2017 and earlier years), and (2) NOL carryforwards arising in 2018 and later years against up to 80% of their taxable income. Also under the CARES Act, NOLs arising in 2018, 2019, and 2020 can be carried back 5 years. Allowing NOL carrybacks can be particularly valuable to corporations in view of the higher corporate income tax rates prior to 2018.

    Excess Business Losses (CARES Act § 2304; I.R.C. § 461(l))

    Beginning in 2018 under the TCJA, individuals’ deductions of net business losses were limited to $250,000 for single taxpayers and $500,000 for married taxpayers. Their excess business losses were carried forward as NOLs. In the case of partnerships and S corporations, this loss limitation was imposed at the partner or shareholder level. The business losses subject to this rule included active trade or business losses and any otherwise allowed passive losses.

    This provision can be especially important to business aircraft owners who incur large depreciation deductions that result in business losses. However, since excess business losses were carried forward as NOLs, and as NOLs they were not subject to the excess business loss limit in future years, the limitation on excess business losses often resulted in only a one-year delay in the deduction.

    Nevertheless, the excess business loss limitation was problematic for taxpayers who reported large capital gains from the sale of a business in the same year that they incurred large business losses from depreciation deductions on aircraft. In that situation, the excess business loss from aircraft depreciation would result in NOL carryforwards to future years, which may not be deductible if the taxpayer had no significant business income in future years.

    Under the CARES Act, the excess business loss limitation is retroactively amended so that it does not apply in 2018, 2019, and 2020. Instead, it first applies in 2021.

    The CARES Act also made changes to the excess business loss calculation, which will become relevant when the limitation applies in 2021. The calculation of net business losses that could be taken into account under the TCJA appeared to include salaries and wages income, but the CARES Act clarifies that such income is excluded from the calculation. In addition, the CARES Act clarifies that gains from sales of capital assets are only included if such gains are attributable to a trade or business, and losses from sales of capital assets are excluded entirely.

    Acknowledgements: NBAA thanks Tax Committee member John B. Hoover for contributing this article for the benefit of members. Hoover is a partner with NBAA member Holland & Knight, LLP, specializing in business aviation tax matters. He can be reached at 703-720-8606 or by email.

    This article was originally published by NBAA on April 2, 2020.

  • Tracey Cheek posted an article
    Treasury Establishes COVID-19 Emergency Payroll Support to Air Carriers and Contractors see more

    NAFA member, Greenberg Traurig, LLP, shares the latest information on the U.S. Department of the Treasury's COVID-19 Emergency Payroll Support to Air Carriers and Contractors.

    On March 30, 2020, the U.S. Department of the Treasury (Treasury) issued guidance on assistance to the air carrier industry as contemplated by the emergency relief provisions of Section 4112 of the Coronavirus Aid, Relief, and Economic Security Act (Cares Act). The guidance provides guidelines and application procedures for payroll support to air carriers and contractors. 

    The Program

    Under Section 4112(a) of the CARES Act, Treasury is authorized to provide payments to passenger air carriers, cargo air carriers, and certain contractors up to the following aggregate amounts:

    • Passenger air carriers: $25 billion
    • Cargo air carriers: $4 billion
    • Contractors: $3 billion.

    Basic Definitions

    Who is an air carrier?

    • an individual who is a citizen of the United States;
    • a partnership, each of whose partners is an individual who is a citizen of the United States; or
    • a corporation or association organized under the laws of the United States or a state, the District of Columbia, or a territory or possession of the United States, of which the president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, which is under the actual control of citizens of the United States, and in which at least 75% of the voting interest is owned or controlled by persons that are citizens of the United States, in each case undertaking by any means, directly or indirectly, to provide foreign air transportation, interstate air transportation, or the transportation of mail by aircraft.

    Who is a cargo air carrier?  An air carrier that, during the time period from April 1, 2019, to September 30, 2019, derived more than 50% of its air transportation revenue from the transportation of property or mail, or both.

    Who is a contractor?

    • a person that performs, under contract with a passenger air carrier conducting operations under 14 C.F.R. Part 121:
      • catering functions, or
      • functions on the property of an airport that are directly related to the air transportation of persons, property, or mail, including but not limited to the loading and unloading of property on aircraft; assistance to passengers under 14 C.F.R. Part 382; security; airport ticketing and check-in functions; ground-handling of aircraft; or aircraft cleaning and sanitization functions and waste removal; or
    • a subcontractor that performs the above functions.

    What are catering functions?  The preparation, assembly, or both, of food, beverage, provisions, and related supplies for delivery, and the delivery of such items, directly to aircraft or to a location on or near airport property for subsequent delivery to aircraft.

    Who is an employee?  An individual, other than a corporate officer, who is employed by an air carrier or a contractor in the United States (including its territories and possessions).

    Who is a passenger air carrier?  An air carrier that, during the period from April 1, 2019, to September 30, 2019, derived more than 50% of its air transportation revenue from the transportation of passengers.

    What are wages, salaries, benefits, and other compensation? For purposes of Section 4113(a)(2) and (3) of the CARES Act, remuneration paid by the applicant to its employees for personal services and includes salaries, wages, overtime pay, cost-of-living differentials, and other similar compensation, as distinguished from per diem allowances or reimbursement for expenses incurred by personnel for the benefit of the applicant.

    Program Eligibility

    To be eligible to receive payments under the payroll support program, an applicant must agree to:

    • use such payments exclusively for the continuation of employee wages, salaries, and benefits;
    • refrain from conducting involuntary layoffs or furloughs, or reducing pay rates and benefits, of employees of the applicant and its subsidiaries (or, in the discretion of the Secretary of the Treasury, any affiliated entity) until September 30, 2020;
    • through September 30, 2021, ensure that neither the applicant nor any subsidiary or affiliate thereof purchases, in any transaction, an equity security of the applicant or the direct or indirect parent company of the applicant that is listed on a national securities exchange; and
    • through September 30, 2021, ensure that the applicant shall not pay dividends, or make other capital distributions, with respect to the common stock (or equivalent interest) of the applicant or any subsidiary thereof.

    Awardable Amounts

    The amount that may be awarded to an approved applicant is an amount equal to the compensation paid by the applicant to its employees, as determined by the Secretary of Treasury in his sole discretion, for the period April 1, 2019, through September 30, 2019 (Awardable Amount).

    The Awardable Amount is determined in one of three ways:

    • For an air carrier that reports salaries and benefits to the Department of Transportation pursuant to 14 C.F.R. Part 241, the Awardable Amount is an amount equal to the salaries and benefits reported by such air carrier on such reports pertaining to the time period.
    • For an air carrier that does not transmit reports under 14 C.F.R. Part 241, the Awardable Amount is an amount that such carrier certifies, using sworn financial statements or other appropriate data, as the amount of wages, salaries, benefits, and other compensation paid by such carrier during the time period.
    • For a contractor, the Awardable Amount is an amount that such contractor certifies, using sworn financial statements or other appropriate data, as the amount of wages, salaries, benefits, and other compensation that such contractor paid its employees during the time period.

    In the event that Awardable Amounts payable to approved applicants in any category (passenger air carriers, cargo air carriers, or contractors) exceed the aggregate amount authorized to be provided to such category, Treasury may reduce, on a pro rata basis, the amounts payable to approved applicants in such category in order to address such shortfall.

    Other Restrictions

    Additional restrictions on applicants include undertakings with respect to other items specified in the CARES Act, including:

    • collective bargaining agreements;
    • limitations on certain employee compensation;
    • the issuance of financial instruments to Treasury to compensate it for the award of funds;
    • audit and reporting requirements;
    • prohibitions on suspension or debarment;
    • limitations or prohibitions on insolvent or nearly insolvent applicants;
    • disclosure of information to the Department of Transportation; and
    • continuation of certain air service.

    How to Apply

    An applicant must complete the Payroll Support Application Form, including a proposal identifying a financial instrument (or instruments) and proposed terms for such instruments that would provide appropriate compensation to the federal government in exchange for payroll support. If the applicant is not an air carrier that reports salaries and benefits to the U.S. Department of Transportation under 14 C.F.R. Part 241, the applicant must also include a sworn financial statement certifying the amount of compensation paid to its employees during the period from April 1, 2019, through September 30, 2019. Treasury may request appropriate documentation in support of the sworn financial statement at a later time.

    An applicant must also complete a Payroll Support Agreement, which will be provided by Treasury after an application is received. The Payroll Support Agreement will include terms containing:

    • the assurances described above;
    • the compensation limitations in Section 4116 of the CARES Act;
    • certain other conditions and covenants; and
    • provisions for the clawback of payments upon the applicant’s failure to satisfy its assurances, conditions, or agreements.

    Timing

    To receive approval of their applications as soon as possible, applicants should submit their completed application materials not later than 5:00 p.m. EDT on April 3, 2020. Applicants may submit their application materials to PayrollSupportApplications@treasury.gov. In the coming days, Treasury will provide a web-based form for application submissions.  Applications received after 5:00 p.m. EDT on April 3 will be considered, but may not receive approval as quickly. Applications received after 11:59 p.m. EDT on April 27, 2020, may not be considered, but the Secretary of the Treasury may, in his discretion and subject to the availability of funds, consider such applications for approval.

    Application Form

    The application form, as well as additional guidance on the program, is available on Treasury’s website.

    For more information and updates on the developing COVID-19 situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019.

    ATTACHMENTS

    This article was originally published by Greenberg Traurig, LLP on April 1, 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
    The Closing: The Final Step to Completing the Aircraft Acquisition! see more

    NAFA member, Amanda Applegate, Partner, Aerlex Law Group, discusses steps to completing your aircraft purchase.

    At long last, you have found the aircraft that fits your needs, the pre-purchase inspection is complete and the discrepancies have been remedied. It is now time for the closing. What does this mean and what needs to be done? For many first-time aircraft buyers, they think the closing will be a long drawn out event. However, I tell all of my clients that the closing should be a non-event and if all of the work has been done in advance, the actual closing should take less than 10 minutes. Once the purchase agreement is executed, a closing checklist should be developed to track all of the deliverables needed through closing. Here is a list of the important items that need to be accomplished shortly before closing:
    1. Aircraft Positioning –
    The purchase agreement should identify the delivery location and who is required to pay the movement costs, if any. The closing cannot occur until the aircraft arrives at the delivery location and in the required delivery condition.
    2. Closing Documents –
    There is an actual filing window at the Federal Aviation Administration (“FAA”) registry in Oklahoma City, OK. All of the closing documents should be pre-positioned with the escrow agent in Oklahoma City, as the escrow agent will be responsible for filing the applicable documents with the FAA. As the buyer, the required FAA closing documents are a registration application FAA Form 8050-1, a statement in support of registration if the purchasing entity is a limited liability company, lender documents if applicable, and a declaration of international operations if there is an upcoming international trip. As the seller, the required FAA closing documents are a bill of sale FAA Form 8050-2, as well as any lien releases if necessary. Additionally, the buyer and seller will each need an active transacting user entity account with the international registry in order to register the contract of sale at closing. Further, the purchase agreement more than likely requires other non-FAA closing documents, such as a delivery receipt and warranty bill of sale.
    3. Insurance –
    During the purchase process an insurance carrier should have been selected and a determination on the amount of coverage required. Shortly before closing, insurance should be bound and the buyer should receive and review the certificate of insurance. If the aircraft is financed or managed by a third party, these parties will have specific insurance requirements which need to be evidenced on separate insurance certificates.
    4. Maintenance Programs and subscriptions – 
    If the aircraft is enrolled in any maintenance programs or subscription services, the third party providers must be contacted to confirm the account is in good standing, paid in full and transferrable upon closing.
    5. Closing Statement –
    The escrow agent will prepare a final accounting statement based on the terms of the purchase agreement and information provided by the parties. The statement will usually include the purchase price and any other fees due under the purchase agreement or to third parties, such as brokers. Any movement costs or similar expenses should be calculated a few days prior to closing and agreed upon by the parties prior to the day of closing.
    6. Inspection Facility Invoice –
    Oddly this is an item that can often cause a delay in closing. The aircraft cannot depart the inspection facility for the delivery location until all invoices are paid. However, invoices can’t be paid until they are final. The invoices from the inspection facility are very detailed and often take a long time to get into final form. Once received they must be reviewed in detail since certain costs are buyer costs and other costs are seller costs as dictated by the purchase agreement.
    7. Tax plan – 
    The tax planning at the federal and state level for the acquisition should have been completed while the pre-purchase inspection was occurring. At closing, the tax plan should be implemented. 

    All of the items above can be accomplished in the days leading up to closing. If done properly the actual closing is a series of emails or a conference call with all parties lasting less than 10 minutes!

    This article was originally published by BusinessAir Magazine, The Latest, on November 19, 2019.

  • Tracey Cheek posted an article
    Structuring an Aircraft Sale to a Flight School see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your aviation finance questions.

    Q: Hi Adam, I’m the owner of a 77 B-55 Baron. My local flight school is interested in purchasing it but is unable to finance. Any ideas on how to structure a sale?

    A: If the flight school is unable to secure financing through an SBA loan or other means, seller financing might be an option. With AOPA’s Pilot Protection Services added to your membership you will have access to consultation with one of our panel attorneys. They would be able to help set up the appropriate contracts to facilitate the sale. 

    Q: I'm an AOPA member that recently purchased an airplane in Missouri and brought it back to North Carolina two days after purchase.  I intend to eventually incorporate business use into my flight time, but for now the use is personal.  I have two questions:  What sales tax can I expect to pay on this purchase, and from what state would I be taxed? I intend to upgrade avionics for ADS-B requirements.  If I incorporate business use into my flying before the avionics purchase, is any of this deductible or do I need to put it under an LLC before this happens?

    A: For tax-related questions your CPA would be able to provide the appropriate answers. Additionally, AOPA’s Pilot Protection Services has in house attorneys that specialize in aviation tax law. Adding PPS to your membership will give you access to these attorneys.  

    This article was originally published by AOPA Aviation Finance Company on October 23, 2019.