Business aviation’s many potential benefits come with various responsibilities – some of them quite complex. Arguably leading the list are the federal, state and local taxes that come with owning and operating a business aircraft of any size. Inadequate knowledge of their requirements, documentation and reporting can return frustrating penalties rather than financial rewards.
The best time to sort out taxes is before you buy the aircraft, according to Brent Snyder, managing director of Andersen Tax. Snyder says the first question should be: “Does a plane work for me? The answer depends on how you acquire it, and how you own it, outright or fractional, or something that looks like fractional but is really a lease agreement,” says Snyder. “The tax burden for each is different.”
These questions are best answered by a team of experienced aviation tax advisers who examine the company’s financial and operational particulars before recommending a plan that works within the FAA and tax requirements, says Joanne Barbera, of Barbera & Watkins, LLC.
“The broad categories are federal income and excise taxes and state and local taxes,” Barbera says. “The issues are essentially the same for both turbine- or piston-powered aircraft, though some small piston planes aren’t subject to excise taxes on passenger air transportation.”
Don’t Overlook These Things
Also plan for sales and use taxes, and where you take delivery of the aircraft, says Snyder. “Every state is different, and some impose no sales taxes if you take delivery there and base it in another state after taking delivery,” he says.
However, most states impose a use tax, personal property tax and/or registration fees where aircraft are hangared and/or used. And don’t overlook things such as standard industry fare level (SIFL) rules and how the use of aircraft counts as income for some employees.
After the team sets up the structure that promises the most beneficial returns for your tax environment, don’t expect your accounting department to make it work if they’re new to the aviation realm, says Ryan DeMoor, CAM, of MySky and vice chair of NBAA’s Tax Committee.
“Be proactive,” DeMoor says. “Ask the transaction/acquisition team for a thorough tax checklist and to recommend human and technical resources that will help the company reap the full rewards of its business aircraft.”
Conversely, DeMoor says, if the company has someone well versed in the realm of business aircraft taxes, protect this knowledge with a succession plan that ensures the continuity of this expertise in case this person retires or departs suddenly. Regardless of the structure, contemporaneous documentation of every aspect of the operation is essential, DeMoor advises.
“With bonus depreciation being what it is today, if you’re not tracking business and personal use of the aircraft, you could lose your bonus,” says DeMoor. “It’s equally important to look into your tax future. Given that bonus depreciation shrinks with time, if you’re six years into a 10-year aircraft, maybe you should replace it now before you exhaust your bonus depreciation.”
Given the complexity of the U.S. tax code, Snyder says it should surprise no one that business aircraft taxes have a lot of moving parts. “But,” says Snyder, “if you have a good system in place, including documentation, it will reliably meet your responsibilities.”