The cash flow analysis and bookkeeping associated with an aircraft can be burdensome, but is essential. It supports many tax positions, helps to ensure operations continue to run smoothly, and can also be a key part of having an FAA compliant structure. However, if the bills are being paid on time, and the yearend numbers are in line with expectations, then most owners may not think to give the numbers a closer look, which could lead to trouble.
Aircraft are Different
There are unique requirements for managing the cash flow associated with an aircraft. For aircraft operated under Part 91, this includes the general prohibition on receipt of payments for flights. There are exceptions to this general rule, but they have very specific requirements relating to cash flow. While it may be routine to allocate the costs of other assets between related companies by making intercompany payments, or journal entries in the records, these types of payments are prohibited for aircraft unless they meet specific requirements.
In certain aircraft structures it may be required that payments for different types of expenses come from specific parties. For example, in a dry lease structure the main company that leases and operates the aircraft needs to directly pay for flight crew, and needs to make a separate dry lease payment to the aircraft owner. If the main company operating the aircraft is related to the company that owns the aircraft, there may be a temptation to just consolidate all payments relating to the aircraft in one entity, or in one account to make things more efficient. However, this creates an FAA compliance issue and likely creates tax problems as well.
Dig into the Numbers From Time to Time – Check the Cash Flow
To help ensure continued compliance take time to review the aircraft cash flow in depth on a routine basis. Be sure to confirm that payments are being made between the proper parties, and that the payments meet the FAA and tax requirements for your structure. The earlier that any issues are discovered the easier it may be to correct them and mitigate any associated risk.
The attorneys at Jetstream Aviation Law can be a valuable member of your aircraft team, providing expertise in spotting and resolving the issues that may cause future problems.
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.