Category: Aircraft Business

Enter The Drones – FAA required to make room for UAVs by 2015

Ari Good aviation tax lawyer drones
Lousy legroom too

Enter The Drones – fSo from the looks of it it’s not so much a question of if, but rather when, private and commercial pilots will be sharing the American skies with unmanned aerial vehicles (UAVs), more commonly known as drones.  The FAA has at least as early as 1991 been collecting information and requests from industry and Congress alike regarding implementing these systems. The FAA Modernization and Reform Act of 2012 requires that the FAA implement the necessary procedures to put drones to share our skies by 2015, although it looks like they’re running into little delays here and there (perhaps not so strange for a government agency).

So, drones, are they a good thing or a bad thing?  Well, I say both.  The possible civilian uses are exciting.  I was listening to people sound off on the issue in a Google hangout (a little virtual town meeting on pretty much anything).  One person who influenced me the most was a fire chief talking about its department’s use of a drone to pinpoint hotspots in a dangerous wildfire.  He said that he would not have been able to get the fire under control nearly as effectively without it, since the area was too dangerous for helicopters and too distant for conventional aircraft.  Industries of all stripes lined up with their favorite uses, ranging anywhere from monitoring oil pipelines to crops to real estate professionals who want the coolest video ever for the neighborhood they’re showing.  The technology is impressive (and undoubtedly has multiple commercial uses).  So, there is no doubt there are some serious potential benefits and a fun, technological “gee whiz” factor.

Now the part that concerns me a bit.  Among the biggest proponents, and biggest customers, for drones are federal and state law enforcement agencies, many of whom already have them, even smaller bodies like my own hometown Collier County Sheriff’s Department.  Now I am a law and order guy but in a Constitutional democracy we have the obligation to ask, and the right to know, the types of policing operations would require mass, continuous and detailed surveillance?  There is no doubt that certain operations would benefit tremendously from this type of technology, and having drones in high-stakes scenarios could save officers’ lives.  The problem is that these machines are not like manned aircraft.  They don’t get tired, they can see almost anything, and they can watch over people 24/7, whether we like it or not.  We need to be honest with ourselves about human nature: isn’t a drone is just too cool a toy to sit underneath the government tree?  I vaguely recall a case from law school in which the court threw out evidence collected from a marijuana grow house because the police used electronic surveillance equipment to “look” through the grow house walls without a warrant.  So, maybe the drones will be looking for terrorists, maybe for pot, but what about a politically unpopular land-use or political gathering?  Food for thought.

In any case drones are already a reality in our US skies.  It is essential that the FAA continue to develop the appropriate regulatory and operational framework with the Constitution in mind.  From a technological standpoint, too, we also need to make dern sure we don’t have Predators smashing into cargo ships full of Spongebob Squarepants paraphernalia or shooting down 172s.  It sounds funny but computers can and do make mistakes, and these would be big mistakes.  There must be some sort of civilian oversight of law enforcement use of the drones, and, in my view, military missions are probably prohibited under the Constitution.  Given that there are some years of implementation to come it’s worth having a look at the issue and the current debate.

Deduct Your Flying Lessons

Deduct your flying lessons:  Can you take a tax deduction for your flying lessons?  The short answer:  yes, but it depends on your situation and the circumstances. To justify such a deduction, a taxpayer must show that the lessons are a reasonable and necessary business expense and not just helpful or useful.  Alternatively, a taxpayer could argue that the lessons are an educational expense necessary for a job that requires private flight.  The pilot must take due care to make these decisions up front so that he has a good defense in the event of an audit. Unlike in most other areas of US law it is the taxpayer’s burden to prove that a claimed deduction is legitimate.

In early 2012, a U.S. Tax Court considered this question and ruled that an experienced commercial real estate broker’s flight lessons were non-deductible.  The broker’s job involved identifying large properties to sell and drafting detailed brochures for prospective buyers.  From 2005 to 2007 he chartered airplanes to assist in finding and evaluating such properties.  During these flights, a licensed pilot flew the airplane while the broker took photographs that were included in the brochures.  To avoid future expenses of chartering flights the broker took flight lessons and purchased a Cessna 172s aircraft to perform the same task.  He subsequently claimed those flight lessons as an expense of $33,000.00 on his 2007 federal income tax return.  When the claimed deduction was challenged in court, however, he could not provide any receipts or invoices documenting the flight lessons, and therefore could not take a tax deduction for those flying lessons.

Deduct your flying lessons
Can you take a tax deduction for flying this big boy?

Upholding the IRS’ determination, the Court found that the broker failed to prove that flight lessons were an educational expense required for the business of a commercial Realtor   The Court concluded that while evaluating properties from the air may be helpful to a Realtor this particular broker had been able to do so earlier without the necessity of actually piloting a plane.  He could not explain why flight lessons were now required in order to view the properties or obtain aerial photographs.  Regarding the claimed business expense, the broker failed to provide evidence that flight lessons are normal, usual, or customary for commercial Realtor.

Adding insult to injury, the Court made a point of saying that the broker had not acted in good faith for claiming the subject deductions and upheld the 20% penalty assessment.  A taxpayer may be penalized if they act negligently or disregard (careless or otherwise) the tax law.  The Court noted that the broker was a sophisticated taxpayer with 20 years of experience as a licensed financial advisor and commercial Realtor   The Court similarly dismissed the broker’s defense that he just relied on professional advice in setting up his airplane structure.   The Court found broker had also erred in failing to keep financial records regarding the cost and purpose of the flight lessons.

These deductibility rules apply not only to the novice aviator but also those with years of flying experience.  As long as a taxpayer can justify the claimed deduction there is no rule barring that person from advancing their education and improving their rating, however, the taxpayer must continue to demonstrate that such expenses are an ordinary and necessary part of his existing business.  Cases in which the pilot deducts flight lessons in preparation for another career (such as moving from a general aviation pilot to an airline or transport pilot) seldom favor the taxpayer.

Careful planning can avoid the pitfalls illustrated above.  Here the deductions were disallowed not because of a “per se” rule against claiming a deduction for flight lessons but because he failed to demonstrate and document the connection between his real estate business and private flight.  The result may have been different, for example, if there was no viable option for sustaining his real estate business other than to fly privately, perhaps if the taxpayer owned real property spread over a large geographical area or in hard-to-reach places.

Consulting with a knowledge and experienced aviation tax advisor will ensure you’re on the right side of tax law (or a court’s opinion).

Government Use of Business Aircraft: Tax efficient, or not?

Business AircraftWe all have to pay taxes. It’s an inescapable fact of life. But how are our taxes used, and by whom? Taxes pay government salaries, fund projects, create infrastructure, and buy equipment. Taxes also pay for where government employees work, and for how they get around. When government workers travel by air on business, they travel in taxpayer-funded aircraft. The question is, is it tax efficient, and is it worth the cost?

In June 2012, the National Business Aviation Association (NBAA) hired NEXA, an aerospace advisory company, to do a study on the use of business aircraft by the government to find out whether it was truly tax efficient. In it, government officials claim that using business aircraft is essential to running an efficient government. It is a way to transport staff, move cargo, send emergency workers quickly to a site, and is even used by law enforcement. According to the NBAA report, “The aircraft provide taxpayer value by providing public safety and security, more effective government, protecting public health and welfare, facilitating economic growth, improving tax dollar efficiency, promoting good government relations, and improving compliance.”

The big issue at hand here is value. It’s important to look at the cost per person average when doing a value analysis between ground travel and air travel. While it’s cheaper for one person to travel by car, the cost drastically goes up for groups of four or more. Due to the sheer volume of workers that the federal and state governments employ, traveling in larger groups is very common way of doing business. The NBAA study shows that when 8 or more people travel together, going by business aircraft costs nearly half of what it would if traveling by car.

When analyzing the financial value to the taxpayer, it’s clear that the government’s regular use of business aircraft provides budget savings for travel, reduces turnover, increases overall productivity, and adds to local economic development. When your tax dollars help develop local economies through better forms of travel, they are adding to their overall “tax dollar efficiency”. Now, the same can’t be said when government officials use the same aircraft to go on vacations, or make talk show appearances, but nobobdy’s perfect, especially not the federal government. In any case, generally, this creates less wasted spending, which benefits both the taxpayer and the government.

The consensus of this report is that without such heavy government use of business aircraft, our taxes would be significantly higher. It would also greatly slow down, or in some cases, eliminate certain government services. The government is well aware of how beneficial using business aircraft is to their bottom line, but should also be aware of how beneficial this is to us, the common taxpayer. Much like a large corporation, the government is charged with delegating expenses to where they make the most sense. Is there still potential for misusing or wasting taxpayer funds on business aircraft use? Absolutely. But in almost all cases, it’s the most efficient way to travel. And being efficient with your tax dollars is good for all of us.

Feel free to share your thoughts in the comments section below.

Federal Excise Tax Audits: How smart decisions can keep you out of trouble

The Federal Excise Tax (FET) on commercial flights, by definition, is a tax on “amounts paid for transportation by air of persons” under IRC Sec. 4261. This generally refers to transportation by air that begins and ends in the United States. Traditionally non-transportation services such as charges for meals, hotel accommodations and so forth have not been subject to FET, nor have aircraft management services that do not relate to particular flights.

Federal excise tax audits haven’t always been a bone of contention for smaller private aviation companies. More recently, however, management companies, brokers and owners have growing concerns that they may be next on the list to be audited.

The FET has been an easy way for the IRS to target these companies for audit based on the somewhat loose definition of what makes an “amount paid for transportation”. Many private aviation companies charge one fee that includes both transportation and non-transportation components. The operator may subtract the amount received for non-transportation services, and pay the government its 7.5% on the “true” transportation amount, fine. A one size fits all invoice however, while customer friendly, can create a headache. A best practice is to break out the charges for transportation and non-transportation charges for everyone to see. Why make your life hard and the auditor’s job easy?

And what of charter brokers? Upon audit the IRS could view a charter broker as assuming the burden of making sure the FET is paid, despite the fact that he isn’t responsible for the operator’s taxes. The broker could be fingered as a responsible party having touched the taxable amounts. One suggestion: include language in your brokerage agreement that clearly specifies that it is the operator who collects and is responsible for paying “any and all applicable taxes”.

Further, even if you collect a lump sum from you customer, make this separation before sending it along to the operator. You might even consider making two separate payments to the operator based on what THEY consider their taxable or non-taxable services. Be ready to present a detailed account of what you collected, for what, from whom, and who is required to calculate and remit the tax. To a numbers guy numbers speak louder than words.

Contact us today for a brief consultation to make sure your tax records are in line both you’re your business practices and the best practices when it comes to FET. With these matters squared away, and the threat of audit diminished, you can focus your energies where they belong: your business.

Florida extends aircraft maintenance tax exemptions

Florida legislators wisely passed a law that expanded the pre-existing tax exemption for aircraft maintenance costs, including equipment used in repairs. This is great news for general aviation aircraft owners and business aircraft operators. The law was initially passed by the Florida House of Representatives in February 2012, and has been in effect since July 2012.

Under the old Florida law, the maintenance tax exemption was applicable to aircraft weighing more than 15,000 pounds (rotary aircraft weighing over 10,000 pounds). This meant that most light-weight, corporate, and private aircraft were subject to in-state maintenance and repair tax, and small aircraft owners took their business elsewhere accordingly. The new law reduces the weight limit to 2,000 pounds, considerably broadening the types of aircraft that fit in under the state tax exemption.

This revision is a home run for the Florida general aviation community in a sluggish economy. With this new tax exemption there are rising hopes that Florida can return to its leadership role in attracting general aviation contractors and related small businesses. Florida is now one of 32 states to have passed significant aviation-based tax exemptions in the last few years. Both lawmakers, and local business leaders, expect an immediate boost in employment, maintenance traffic, and production.

Rep. Stephen L. Precourt, chairman of the Finance and Tax Committee, introduced the new tax exemption law as a bill, and moved it directly to the House late last year. However, the bill was initially created based on provisions provided by two separate bills, introduced by House Rep. Steve Crisafulli, and Senator Mike Bennett. Their goal was to expand sales, use tax, and maintenance tax exemptions to encourage economic growth in the industry. The new tax exemption bill, formally known as HB7087, was heavily supported by local organizations such as the Florida Aviation Trade Association (FATA), the Florida Airports Council (FAC), and the Aircraft Owners and Pilots Association (AOPA).