Using a disregarded entity in your aircraft structure can be an excellent option for tax planning, however it is essential to consider FAA concerns. The FAA recognizes all entities as separate, even those that may be disregarded for tax purposes, and prohibits sole purpose entities from operating aircraft under Part 91.
What is a Disregarded Entity?
Single-member limited liability companies (LLCs) that have not made other elections are disregarded by the Internal Revenue Service (IRS) for federal income tax purposes. In the eyes of the IRS these single-member LLCs are not separate from their owner, which means any activity in the LLC is viewed as activity of the owner and generally reported on the owner’s federal income tax return.
What is the FAA Issue with a Disregarded Entity?
While the FAA does not have a specific issue with disregarded entities, the FAA does prohibit sole purpose entities from operating Aircraft under Part 91 when carrying passengers or cargo. Most disregarded entities that own aircraft are sole purpose entities. So, while it is permissible for a sole purpose disregarded entity to own an aircraft, that entity cannot operate the aircraft. That entity will need to dry lease the aircraft to a valid operator for Part 91 flights.
It is important to keep in mind that the FAA recognizes all entities, including disregarded entities. For example, if an individual is the sole member of an LLC, which is a disregarded sole purpose entity, the FAA would still treat the individual and the LLC as separate. The LLC could not operate the aircraft it owns carrying the owner of the LLC as a passenger under Part 91. The LLC would need to dry lease the aircraft to the sole member (or another valid operator), so that the sole member (or other valid operator) could operate the aircraft under Part 91.
Lori N. McGee is a partner with the law firm of Jetstream Aviation Law and counsels clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.