Tag: aviation tax

IRS Federal Excise Tax Surprise – New Rules For Aircraft Management Companies?

IRS Federal Excise Tax
IRS excise tax & aircraft management companies:  and you thought the catering was exempt

The IRS’ new view of federal excise tax on aircraft management services in unwelcome indeed. To recap, in an IRS Chief Counsel Memorandum Re Federal Excise Tax and Aircraft Management Companies, the IRS is taking the position that aircraft services such as hiring and providing pilots and management services, even for part 91 aircraft, are “amounts paid” for “transportation services” and therefore subject to federal excise tax.  This in essence has the potential to raise general aviation services costs by 7.5%, a federal excise tax surprise that neither aircraft management companies nor aircraft owners need in this environment.

It has never been disputed that ” amounts paid” for commercial flights under Parts 121 or 135 are subject to excise tax as “taxable transportation”, and the price and availability of these flights reflect this.  Part 91 owners and operators make a conscious decision to assume more risk in retaining “operational control” of their flights and pay management companies for collateral services in making pilots, fuel and services available.  We could be left under the IRS’ new policy where a private aircraft owner would have to pay excise tax for flights over which he still has full legal liability.  This is clearly a surprise when it comes to federal excise tax, for the owners and aircraft management company alike.

Unfortunately there is also a “gotcha” factor here.  One might conclude that the IRS’ apparent aggressiveness with respect to auditing, and potentially assessing, federal excise tax against aircraft management companies is designed to catch us off guard.  There are a couple of problems with this.  First, a Chief Counsel opinion details the Service’s interpretation of existing law.  It is not equivalent to the Internal Revenue Code, regulations or Tax Court decisions, and therefore forms a questionable basis upon which to set aircraft management companies up for formal federal excise tax audits.  Second, if in time aircraft management companies are deemed to be receiving “amounts paid for taxable transportation” for support services, the industry must be given some reasonable opportunity to adjust to this without facing retroactive application of a brand-new interpretation along with the interest and penalties that go with it.

Call me for a free phone consultation if you think you may be subject to the new federal excise tax rules.  877.771.1131

Year End 100% Aircraft Bonus Depreciation

Aircraft Bonus Depreciation
Aircraft bonus depreciation still in sight

From year-end 2011:  “As the holidays approach our thoughts become preoccupied with but one thing: how can I purchase an aircraft and write off 100% of the cost basis in the first year? Well, perhaps not for everyone, but here’s what you need to know: if you purchase an aircraft and place it in service by December 31, 2011 you will qualify for the 100% bonus provision provided you meet all of the other requirements. This is a considerable benefit under any circumstances.

If this is NOT possible, however, and you must place your aircraft in service next year, you are probably still better off than you would have been had you “only” been able to take the 50% bonus. This is because assets placed in service in the fourth quarter of the year do not receive the full first-year depreciation allowance. Your bonus allowance reverts back to 50% for assets placed in service in 2012. By waiting until early next year, you still receive this benefit, but are now able to take the full year MACRS depreciation allowance. In other words, unless the value of your depreciation allowance is considerably greater than it will be next year, you’re better off taking your time and making sure you have done your tax planning carefully, not only at the federal but also at the state – sales tax – level.”

Update 2012:  The good news:  100% bonus depreciation is still with us on qualified aircraft purchases through the end of this year.  What’s “qualified”?  There are several factors, including that you purchase a new (or substantially rebuilt) aircraft, and that you take delivery and place it in service before the end of the year.

The bad news:  This might not be around forever, which as bad news goes is pretty acceptable in my book.

On “Corporate Jet Loopholes” and other silly titles

Here we are again with the populist rant against the “corporate jet loophole”. Let’s start with some basics: the “loophole” refers to the bonus depreciation provisions that allows taxpayers to write off, in most cases, 100% of the purchase price of new, tangible personal property in the year in which the asset is placed in service.

Now, no one can argue that a 100% writeoff is a bad deal. In fact, it is nearly unprecedented in that under present law there is no ceiling on the amount that can be depreciated. So, as far as “corporate jets” are concerned, it is certaintly nice to have.

Here’s the problem, though, one of many: Exactly how many “corporate jets” are there relative to the amount of capital equipment that is placed in service every year? The bonus provisions are not a corporate jet anything – they will apply to most new purchases of business equipment, perhaps backhoes, vehicles, manufacturing equipment and so on – perhaps the very equipment needed to provide those “shovel ready” stimulus jobs which never showed up. The issue has been framed purely for political purposes: to create the idea that somewhere in the tax code lies a provision hand-crafted and narrowly tailored to give a huge writeoff to “corporate jet” purchasers at the expense of everyone else.

Second, the bonus provisions apply only where the property to be depreciated is “first used” by the taxpayer – i.e. new. There remains a large inventory of used aircraft of all sizes, jets and otherwise, and prices remain largely flat. In terms of the number of units sold the “corporate jet” loophole is smaller than many believe.

This all, of course, sets aside the real damage, which is to the image of general aviation in general, one of the few remaining bastions of American manufacturing. U.S. aircraft manufacturers, and the people that work for them, face more foreign competition than ever from sleek foreign competitors.

Perhaps it’s obvious to point out that this is not about fairness. Rather, it is about cynically pressing buttons designed to inflame and exaggerate classic us versus them cliches. No issue is one-sided, but a little truth wouldn’t hurt.

Bonus Depreciation Extended

President Obama last week signed the Small Business Jobs Act of 2010 into law, extending two key aircraft-friendly tax provisions for another year.  This legislation extends the “bonus depreciation” provisions that have been in place for some time that allow the taxpayer to deduct up to 50% of the purchase price of the plane in that year.  This legislation will also modify the separate “expensing” provision that allows up to an additional $50,000.00 deduction.  What remains of the plane’s basis is then further depreciated under the accelerated, five year, MACRS recovery period.  Put together, these provisions allow an aircraft purchaser (including fractional interest purchasers) to deduct the majority of the purchase price of within the first two years.

The taxpayer must qualify for these benefits, and there are some limitations: 

  • These provisions apply only to noncommercial aircraft predominantly used in a trade or business.  Personal use is accounted for separately and should be undertaken with professional tax advice.
  • The expensing allowance, under the new law, phases out dollar for dollar for aircraft over $2M. 
  • Bonus depreciation is permitted only for new aircraft, whose “first use” is in the taxpayer’s hands.  Used or refurbished aircraft do not qualify.  Fractional interests are considered “first used” by the taxpayer at the time of his purchase.
  • You must enter a written binding contract for his purchase of the plane and place a non-refundable deposit with the seller by the end of this year.  You would have to begin using the aircraft by the end of next year.
  • Depreciation deductions are “recaptured” when the aircraft is sold.  This can be deferred for some time either by continued ownership or by exchanging the fractional interest for another at a later time.  The real tax savings is the time value of the money not paid in taxes during this period.

Ari Good, Esq.

Substantiating Aircraft Business Use

On audit an examiner will consider the degree to which you have documented your business use. This will include not only your flight logs but receipts, meeting records, and other evidence of the business purpose for the plane. Duration also plays a part, especially for “mixed purpose” trips to pleasant destinations. The “predominant” purpose for a trip must be for business, that is, at least the majority of the majority of the days must have been spent on business activities, documented as such. For example, your trip to Telluride might have both business and personal pleasure aspects (it should). Just be sure that you can articulate the business aspects of this trip.