Dec. 2, 2020
Planning is key to navigating the complexities of any aircraft purchase and avoiding the potential of costly errors, tax experts Julianne Christensen and Angel Houck, co-founders of Houck & Christensen CPAs, explained during the NBAA GO Virtual Business Aviation Convention & Exhibition (VBACE).
Moderated by NBAA senior director for government affairs Scott O’Brien, the VBACE session considered the requirements for a successful aircraft transaction, from establishing the aircraft as a deductible asset and eligibility for bonus depreciation to the impact of personal use and state and local tax obligations.
“An aircraft is unlike any other asset you’re ever going to own as far as tax planning goes,” said Houck, in the Dec. 2 session, Top Tax Benefits and Limitations for Aircraft Ownership and Operation.
Houck noted the FAA and federal regulations for aircraft ownership can contradict tax rules for most business assets. “There is no cookie-cutter answer to how do I own, how do I operate and how do I structure my aircraft. It’s very individualized … so it is important that you build a team that really understands aviation,” Houck added.
First, a tax team justifies the use of an aircraft in the ordinary and necessary course of business. Then tax planning proceeds to how the cost of the aircraft is deducted. Christensen explained that annual deductions for assets are usually defined by the IRS, but owners of new and used aircraft currently have access to bonus depreciation. Under the Tax Cut and Jobs Act, owners have the option until 2023 to claim the full cost of an aircraft acquisition in the first year of operation.
There are obvious benefits to this deduction, Christensen noted, but she warned that without proper planning and adherence to rules governing entertainment use, hobby loss, at-risk and basis limitations, passive loss, and excess business and net operating losses, bonus depreciation may not be fully realized and even recaptured by the IRS.
“The focus is on bonus depreciation, but a tax deduction is only good for you if you can actually benefit from it. Sometimes, the straight-line depreciation method might be a better alternative,” Christensen explained.
This planning must extend to state and local tax obligations. “This is often overlooked … but the state and local obligations are unique when you deal with aircraft because these are mobile property, subject to both sales and use taxes,” said Houck. “In some aspects, it is like dealing with 50 different countries.”
Taxpayers also should understand the obligations of aircraft ownership before proceeding with a transaction, noted Christensen.
“I tell my clients that first and foremost they should be comfortable with the pre-tax cost of owning and operating the plane,” she said. “If they are comfortable with that, and you do your pre-acquisition planning, CPAs will maximize your tax benefit for your structure.”