Article – Don’t Treat Your Aircraft Like Other Assets
Thinking that you can treat your business jet like other assets is a mistake. Aircraft are subject to unique requirements, and using the same structures and strategies you have in place for other assets may result in regulatory violations, loss of tax deductions or exemptions, loss of insurance coverage, and other unintended consequences. Some of the ways in which the laws applicable to aircraft differ from other assets are:
Common Ownership Structures
Owning business assets in sole-purpose entities is a common business structure that can align with many business and tax goals. However, there is a unique prohibition that complicates the use of this structure for aircraft. The FAA prohibits sole-purpose entities from operating aircraft under Part 91. If the aircraft is owned in a sole-purpose entity, operational control must be transferred to another party eligible to operate under Part 91. Attempting to own and operate an aircraft in a sole-purpose entity with the goal of providing liability protection will backfire because the operation violates the FAA regulations, which may lead to a loss of insurance coverage and give rise to an argument to pierce the corporate veil.
Restrictions on Allocating Costs
Internally reallocating costs (in some cases with no actual cash payments) is something commonly done with other assets but may result in regulatory violations for aircraft. Operators of Part 91 (non-commercial) flights are generally prohibited from receiving any type of compensation or reimbursement for the flight. There are several exceptions to this general rule, but they are very narrowly construed and may not align with business or tax goals.
Income Tax Deductions
While depreciation and expense deductions are available for aircraft, there are unique rules applicable to those deductions. One area where aircraft deductions must be evaluated differently than those for other business assets is where there is personal or entertainment use of the aircraft. Many business assets do not lend themselves to much personal or entertainment use, but most aircraft owners have at least some of this type of use that must be accounted for in calculating the applicable deductions.
State Sales/Use Taxes
Purchases, leases and the use of aircraft are typically subject to state sales/use tax. Given the fact that an aircraft is likely to be located in multiple states during the course of a year, it is possible that it can incur sales/use tax liability in multiple states. Some of the exemptions to sales and use tax that may be applicable to other assets will not apply to aircraft, and in some states there are unique exemptions for certain types of aircraft.
The aviation industry is highly regulated, and many of the regulations applicable to private aircraft do not neatly align with common tax and business goals for these assets. When contemplating the purchase of an aircraft, there is often the temptation to use structures that are currently in place for other assets as a means of speeding up the transaction, to control costs or simply as a result of being unaware of the requirements. Resist this temptation! It can lead to very costly unintended consequences.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Lori McGee is a Partner with the aviation law firm of Jetstream Aviation Law, P.A. and counsel clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the US Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com. Lori McGee (firstname.lastname@example.org)