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  • 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 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). 


    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.


    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 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.


    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.

  • Tracey Cheek posted an article
    Hot Topics for Bizav in 2020 see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, shares the top-five challenges in business aviation for 2020.  

    The U.S. finished 2019 at the top of the world of business aircraft transactions and it is well-positioned to continue its leadership this year. Of course, every year presents important challenges and there are five that I believe will affect many aircraft owners, lessors, lenders, managers, insurance and buy/sell brokers, technical consultants, and other industry participants in 2020. Here are my top-five challenges for this year:


    The International Aircraft Dealers Association (IADA) expects its member brokers and other aircraft transaction professionals to abide by professional standards and ethics rules under IADA’s code of ethics. To put its standards into practice, among other steps, IADA admits new members under an accreditation process administered by an independent outside firm.

    IADA is far from alone in its important efforts. By issuing its statement regarding ethical conduct, the National Air Transportation Association (NATA) strongly asserts that every member company should use these guidelines to enforce high levels of ethical behavior, safety, integrity, accountability, and respect for others. NATA urges its diverse general aviation members to use these guidelines to enforce compliance and deter wrongdoing. Further, NBAA published ethical business aviation transactions guidelines to establish core ethics and business conduct standards in transactions between buyers and sellers of business aircraft products and services.

    It’s no secret that some industry participants believe others act outside such ethical guidelines. Still, each person has a new opportunity in 2020 to renew his or her efforts to play by the applicable rules urged on them by their respective associations regardless of inconsistent or questionable behavior of others.


    After seeing the FAA take multiple actions against illegal charters in 2019, you might conclude that illegal charter operations will be unstoppable in 2020. Not so.

    In my experience, most charter and on-demand flight services operate legally, will happily demonstrate their capabilities, and explain how they comply with the FARs. Unfortunately, other operators test the limits or flat out operate illegally in violation of the FARs.

    The FAA focuses on safety and enforces the FARs. Two big buckets of rules in the FARs, among others, cover legal operation of business aircraft: private flight operations under FAR Part 91 and commercial or on-demand flight operations under FAR Part 135.

    A Part 135-compliant operator must obey stringent operational, training, and other rules designed to assure passenger safety. Part 91, not so much; an operator has fewer requirements under the FARs in part because they do not, if in compliance, transport persons or property for compensation or hire as permitted for certified operators under Part 135.

    Anyone, including prospective passengers, can help curb illegal flight operations in 2020 by doing modest diligence on charter operations you observe or might use. For example, as a prospective passenger, you can potentially identify violators, reporting your concerns to the FAA and taking your charter business elsewhere. NATA’s website posts a hotline telephone number for customers or others to report violators.

    One tell-tale sign of a potential problem might appear if the price of a flight is much lower than one provided by another operator. Although that may be good news for your wallet, it might also reveal an illegal operation that lowers its prices to edge out operators that incur higher costs to comply with FAR Part 135.

    If a charter operator tells you, or you discover, that you, and not the charter operator, will exercise “operational control” of the flight, that is a red flag warning of a potential illegal charter operation under the FARs. Operational control means you will be responsible for the initiation, conduct, and termination of the flight (14 CFR 1.1), a position that puts you in the personal liability hotseat should certain things go wrong with the flight.

    For more, NATA and NBAA offer valuable materials on illegal charter operations.

    Although a bit different than illegal charter, I have seen and discussed with many colleagues illegal private operations under Part 91 categorically called “flight department companies.” Often taking the form of limited liability companies (LLCs), LLC members sometimes erroneously believe that the LLC, which has no business enterprise, can operate its aircraft and receive “compensation” from family, friends, associates, or others that “borrow” or “use” the LLC’s aircraft.

    Compensation is a very broad term in the FAA’s view and occurs in many ways, including when passengers share expenses or reimburse the LLC for aircraft operating costs. With very limited exceptions, these flight operations are illegal, prohibited under the FARs, and subject to FAA enforcement action.

    Expect both illegal charter and flight department company operations to be on the FAA’s radar in 2020, likely more so than you have ever seen before.


    A buyer committed to purchasing an aircraft should make a New Year’s resolution to analyze primary tax aspects of owning, operating, and storing the aircraft, and tax minimization structures, ideally, before signing a letter of intent to buy an aircraft. This analysis should at least cover federal income, state sales/use, and local property taxes to calculate the total tax costs of, or potential tax write-offs with respect to, acquisition and ownership of an aircraft.

    Typically, clients start with questions on claiming 100 percent “bonus depreciation,” which continues to be available in 2020. For this year, the Tax Cuts and Jobs Act of 2017 allows aircraft owners, with limitations for personal use, temporarily to take 100 percent bonus depreciation deductions on new and preowned aircraft against gross income if the taxpayer uses the aircraft in its trade or business or for production of income. (For more, see AINsight: Maximize Aircraft Bonus Depreciation in 2019 and AINsight: 100% Depreciation and Aircraft Personal Use.)

    Early in the buying experience, many buyers also express an understandable aversion to paying any property, sales, or use tax—and often believe they can avoid these taxes entirely. It is imperative to consider recent changes in law and tax rates that came into effect on January 1 and how to eliminate or reduce these taxes.

    To advance your planning, determine the expected storage/hangar location(s), project the use outside of the aircraft’s home state, and consider various structures to lease your aircraft. Also, determine if or when local tax law imposes an annual property tax on the aircraft for possible tax planning relating to the location of your aircraft on that date. Using all this information, talk with your advisors for structures and strategies that may defer, allocate, eliminate, or otherwise minimize the property, sales, and use taxes.

    Once a purchase closes, always keep accurate, clear, complete, and contemporaneous records on relevant tax-oriented facts for all federal, state, and local tax authorities. Don’t wait for an audit letter to update your books.


    The ADS-B technology mandate, which became effective January 1, has great merit for safety, flight communications accuracy, and other reasons.

    However, private third-parties can—using inexpensive, commercially available receivers—pick up the aircraft’s broadcast of its unique ICAO address and thereby capture information directly from ADS-B transmissions that an aircraft operator might prefer to remain confidential. Such information includes an aircraft’s identification, altitude, GPS positional data, and velocity.

    To address these privacy concerns, ADS-B operators should quickly evaluate and, if using 1090-MHz ADS-B equipment, decide whether to participate in the FAA’s Privacy ICAO Address (PIA) program, starting this month. In December, the FAA established an application process for operators to use and periodically change temporary ICAO aircraft addresses that aren’t tied to an operator in the Civil Aviation Registry (CAR).

    The PIA program is limited to U.S. domestic operations to avoid potential conflicts with other ICAO member states that currently do not offer this capability. That means privacy breaches might still occur on flight operations outside the U.S.

    The PIA program differs from the FAA’s new Limiting Aircraft Data Displayed (LADD) program. Operators that do not wish to allow the FAA to share aircraft data the FAA receives, including tail number, call sign, and flight number, can submit LADD requests via FAA’s dedicated LADD website. The LADD program, which replaces the Block Aircraft Registry Request (BARR) program, does not impact the ADS-B broadcast data, which, as noted, transmits information directly to capable receivers.

    For maximum privacy domestically in the U.S., sign up for both the PIA and LADD programs.


    If you plan to buy or renew insurance coverage in 2020, buckle up. Plagued by years of huge payouts and financial losses, some insurers have exited the market, resulting in reduced liability insurance capacity for all aircraft and much higher premiums (anecdotally, 20 percent to up to 300 percent of 2019 rates).

    The best operators should still be able to maintain or even improve coverage in 2020 at higher premiums provided their insurers agree that the customers have a stellar safety record, outstanding training programs, and experienced pilots with high hours in the type of aircraft insured by the carrier. The story is different for single-pilot, owner/operated aircraft or new pilots who might not be able to find insurance at any price or, if insurance is available, must accept reduced liability limits at higher premiums than in 2019.

    Lenders and lessors might have a different predicament. From transactional activity in 2019, it seems financiers generally required and successfully obtained yesteryear’s high liability insurance limits. In 2020, lenders and lessors may have to ease back on their demands for such high liability insurance levels and concentrate more on property damage coverage.

    In supporting this easing, lenders and lessors can point to a 2018 federal law amendment that might facilitate approving transactions with reduced liability insurance limits. Under 49 U.S. Code § 44112, Limitation of liability, Congress provided a preemptory shield of business aircraft lessors and lenders from personal injury and property damage liability if they do not have possession or control over the aircraft at the time of the accident.

    Customers should contact specialized aviation insurance brokers well before signing a purchase agreement in 2020, to allow much more time than the week before closing to find insurance with the best terms and lowest cost. (For more, see AINsight: Limiting Risk as Liability Insurance Tightens.)


    Amid the many challenges that business aviation will face in 2020, rather than debate the topics above for long, it is more important to take action now and throughout the new decade for the benefit of clients, customers, and colleagues involved in the business aviation industry. Will you take action and suggest others do too?

    This article was originally published by AINonline on January 10, 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
    Painting the Financial Picture see more

    NAFA member Adam Meredith, President of AOPA Aviation Finance Company, shares what items you need when preparing to finance an aircraft. 

    "You don't really need all of this financial information, do you?" It’s a question often asked by AOPA Finance clients. Yes, yes we do. If you want the lowest rate, the most competitive structuring, the least amount down, and the lowest payment, an exhaustive analysis of your credit worthiness must be made.

    Financial Documentation

    IRS Schedule Cs or Schedule Es are not enough. While they may indicate whether the ownership structure has any pass-through income on an individual's tax return, the description of that pass-through income is summarized as a line item or two. Likewise, K-1s only indicate percentages of a shareholder’s income and liabilities. Line items and percentages don’t tell the whole story. Full tax returns do.

    Global Cash Flow

    Your tax summaries may show cash going from one related entity to another. But are you actually taking from the “left pocket and putting it in the right pocket?” If so, that isn't real money, is it? The lender will net that out of your “global cash flow.” Global cash flow—also known as a Consolidated Statement of Cash Flows—is a listing of all the various entities in which a person has ownership and what their net cash flow from all the entities is.

    And then there’s the global debt schedule.

    Global Debt Schedule

    What is a global debt schedule? It’s a comprehensive list of all the ownership entities. It’s a listing of the actual total debts of each entity in which the individual has ownership. It details what the total amount owed is, and to whom. What the monthly payments are. How much is interest versus how much is principal. It also includes maturity dates for all debt.

    Depending upon what one’s business relationship is with his partners, the lender may require additional documents to help fill in holes in the financial picture. Those might include hypothecation, subordination, or even side agreements.  A hypothecation agreement could be submitted from the controlling party acknowledging the CEO emeritus is entering into a financial relationship.

    Speaking of partners, imagine a borrower has two partners and he owns one-third of the business. Some lenders may require the other two partners’ to be party to the transaction.

    For some, that’s just too much. They’re only going to have the loan for three years so the “pain-in-the-neck” factor is not worth their time and effort. Other folks just don't want to disclose all their financial information for personal reasons. Still others have obligations with lenders elsewhere that restrict them from guaranteeing debt or have covenants in place from other business debt. For these individuals, a collateral-based loan might be the more appropriate option. The trade-off is simplicity for a little bit higher interest rate.

    Collateral Based Loans

    A collateral-based deal might proceed more quickly from initial inquiry to funding but it does come with a different paperwork burden. Even so, the process is usually far less onerous. Banks will conduct an exhaustive search on the quality of the individual as well as on the aircraft. For the individual, they want to know if this person has filed bankruptcy. Do they have tax liens against them? Are there pending lawsuits on them, for any reason? A person applying for a collateral-based loan should be crystal clear how good or bad their character looks on paper.

    Every time an AOPA Finance advisor must request additional information because our client’s paperwork is incomplete adds additional stress to the process. Bottom line-- there are no shortcuts. A transparent, painless credit deal requires in-depth financial paperwork.

    This article was originally published by AOPA Aviation Finance Company on June 12, 2019.

  • Tracey Cheek posted an article
    Taxing Relationships - The New Tax Traffic Controller for Partnership/LLC Aircraft Owners see more

    NAFA member David N. Corkern, J.D., LL.M., aviation attorney with Shackelford, Bowen, McKinley & Norton, LLP, shares information about the recent IRS changes made regarding partnerships and LLCs for aircraft owners.

    Do you own an airplane through a limited liability company that is treated as a partnership to preserve privacy, or to minimize tax or other liability exposure? Or in which the airplane is held in a partnership of all “natural persons” (i.e. human beings)? Regardless of the reason, you’ll want to be aware of the recent changes made to the way those partnerships/limited liability companies (LLCs) are treated by the IRS during an audit. 

    In 2015, with the passage of the Bipartisan Budget Act, the U.S. Congress significantly revised the manner in which partnerships/LLCs are audited. (While LLCs differ from partnerships under state law, they are treated and taxed as partnerships by the IRS, unless they have elected to be taxed as corporations. All references to “partnerships” in this article refer to such LLCs as well.)

    The IRS has issued regulations known as the Centralized Partnership Audit Regime (“CPAR”), effective for audits of partnership tax years beginning on or after January 1, 2018. The CPAR requires that all partnerships designate a “partnership representative.” 

    This designation must be made for each tax year of the partnership and replaces the “tax matters partner” under the old rules. Unlike the tax matters partner, the partnership representative may be someone other than a partner. Do exercise caution when choosing your new partnership representative, since the IRS will not deal with any other person or entity in case of a tax audit. In addition, the CPAR gives the partnership representative greater powers than the former tax matters partner – to bind the partnership and all of its partners in negotiations with the IRS, notwithstanding any contrary provision in the partnership agreement.

    CPAR also changes the way in which tax adjustments are made. Prior to CPAR, if an audit resulted in additional taxes, penalties, and interest due for the audited tax year, those adjustments would have been made at the partnership level and each partner’s return also was adjusted. The net result of the pre-CPAR audit was that taxes, penalties, and interest were collected from those who were partners in the audited tax years.

    Now under CPAR, the IRS will assess all taxes, penalties, and interest against the partnership, which shifts the burden to current partners, and not to those who were partners for the years under review. 

    For example, assume that “High-Flying, LLC” owns an aircraft. From 2012 through 2016, individuals A, B, and C were equal partners in High-Flying, LLC. When C sold his interest to D in January, 2017, D became an equal partner with A and B in High-Flying, LLC. If, after audit, the IRS determines that additional taxes are owed by High-Flying, LLC for tax year 2016, High-Flying, LLC will bear that cost, and D must pick up the tax tab for the former partner, C, absent an “opt-out” or “push-out election” discussed below.

    How can a new partner be protected from bearing someone else’s tax liability under CPAR? There are two ways to do so:

    First, a partnership with fewer than 100 partners and no ineligible partners (e.g., partnerships, trusts, and LLCs taxed as partnerships) may elect out of CPAR. This “opt-out” election is made yearly on the partnership’s tax return. 

    Second, a partnership may use a “push-out” election to shift the tax audit adjustments to former partners. The “push-out” election also must be made yearly on the partnership’s tax return.

    If you are thinking of buying or selling an interest in a partnership or limited liability company that owns an aircraft, pay close attention to the shifting tax liability created by CPAR. These rules are somewhat complicated and it’s always a good idea to consult an expert before amending any partnership agreement to comply with CPAR.

    This article was originally published in Business Aviation Advisor on July 1, 2019.

  • Tracey Cheek posted an article
    Tax Requirements on an Aircraft Purchase see more

    NAFA member Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about tax requirements when purchasing an aircraft.

    Question: I purchased a plane last year utilizing AOPA.  One thing I was not made aware of until later in the process is that required sales tax (I live in TX) could not be included in the loan so I had to give up almost $7k which I was going to use ADS-B compliance.  No one seems to talk about that. Is that normal?

    Answer: The tax requirements on an aircraft purchase can vary drastically from state to state. Since lenders do not roll taxes into the financing, AOPA Aviation Finance does not typically get involved with tax questions. Often times the selling broker will account for sales tax but we always recommend consulting your CPA or a tax attorney. AOPA’s Pilot Protection Services has attorneys on staff and panel attorneys throughout the country that can assist members with such questions. Members of the PPS plan receive a free 30-minute consultation annually along with a number of other benefits.

    Have questions for Adam? He is happy to answer them. Submit your questions here. Great rates. Great terms. Helpful and responsive reps. Three good reasons to turn to AOPA Aviation Finance when you are buying an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (75263) or click here to request a quote.

    This article was originally published by AOPA Aviation Finance Company on March 28, 2019.