Tax Planning forAircraft Owners

By Daniel Cheung, CPAAviation Tax Consultants, LLC

Columbus, Indiana

Arizona Aircraft Expo

Scottsdale, Arizona

October 23, 2015

Income Tax Planning Sales / Use Tax Planning FAA Regulations Compliance Outside CPA for the aircraft

ATC offers:

Business Owner Self Employed Individual Aircraft Leasing - Flight School / Flying

Club / Charter Companies (Air Taxi) Key - Business Justification

Who Can Write Off an Aircraft?

Ideal fact situations: A doctor owns a medical practice in an S

corporation, 100% shareholder Visit multiple offices and hospitals to see patients,

attend medical seminars A business aircraft is justified to facilitate business

travels Medical practice revenues will justify a business

aircraft

Who Can Write Off an Aircraft?

The aircraft is a business tool in a profitable business

We do not want to start an aircraft business, we have a profitable medical, engineering, consulting business, utilizing a business aircraft

It takes significant revenues to justify an aircraft – starting from scratch is extremely difficult

Income Tax Benefits: Depreciation Operating Expenses become deductible Deferral of federal and state income taxes

MACRS – Modified Accelerated Cost Recovery System, 5 year depreciable live

Section 179 Expensing, $500,000 in 2014

Bonus Depreciation, 50% in 2014 2015?

What is depreciation?

Depreciation Schedule – 5 year life

Half-year convention Half-year deduction in years 1

& 6 Purchase by Sept. 30 52% depreciation in first two

tax years 71% depreciation in first three

tax years

Year 1 20.00%

Year 2 32.00%

Year 3 19.20%

Year 4 11.52%

Year 5 11.52%

Year 6 5.76%

Traditional MACRS Depreciation Schedule: Purchase by September 30th

Mid Quarter Convention 4th quarter purchase (October 1, 2015) Applies when 40% of assets are purchased in

4th quarter Less first year MACRS depreciation (5%) Especially important for used aircraft No proration for bonus and Sec 179 in 4th

quarter (if renewed) Carefully manage business vs personal use

Depreciation Schedule – 5 year life

Mid-quarter convention Purchase after Sept. 30 and

over 40% of all assets acquired

43% depreciation in first two tax years

66% depreciation in first three tax years

Year 1 5.00%

Year 2 38.00%

Year 3 22.80%

Year 4 13.70%

Year 5 10.90%

Year 6 9.60%

Purchase after September 30th:

Part 91 Use Depreciation Expense

Tax Savings (45% tax rate)

Year 1 20.00% 200,000 90,000

Year 2 32.00% 320,000 144,000

Year 3 19.20% 192,000 86,400

Year 4 11.52% 115,200 51,840

Year 5 11.52% 115,200 51,840

Year 6 5.76% 57,600 25,920

Example: Purchase of aircraft at $1,000,000 before September 30:

Part 91 Use Depreciation Expense

Tax Savings (45% tax rate)

Year 1 5.00% 50,000 22,500

Year 2 38.00% 380,000 171,000

Year 3 22.80% 228,000 102,600

Year 4 13.70% 137,000 61,650

Year 5 10.90% 109,000 49,050

Year 6 9.60% 96,000 43,200

Example: Purchase of aircraft at $1,000,000, after September 30:

Section 179 Expensing - $500,000 for new or used aircraftPhase out begins at $2,000,000Dollar for dollar reduction above $2,000,000Complete phased out - $2,500,000Taxable income requirement2015?

50% Bonus depreciationApplies only to new aircraftDealer inventory or demonstrator appliesNo cap on purchase price2015?

General Income Tax Issues

Trade In Credit Like-kind Exchange – Section 1031

Avoid recapture of depreciation on sale of current plane

Recapture is taxed as ordinary income Related Party Rental

Limitation on utilizing accelerated depreciation Personal Use

Proration based on seat hour / mile calculation

Partnership / multiple buyersOne LLC with multiple members

Business use determination One partnership tax return filed

Multiple LLC’s co-owning one aircraft More beneficial and flexible for income tax purpose Each partner operates his own plane Each partner reports his own plane based on his

business and personal usage

Sales and Use Tax

FAQ: Can I set up a Delaware / Montana LLC to buy the plane and not pay sales tax?

Answer: Yes, sales tax is not due to Delaware / Montana, but you can bring the plane home to Arizona and pay use tax.

Sales and Use Tax enforcement FAA registration information is forwarded

to the state department of revenue Airport hangar audit, listing of tail numbers Aircraft registration

Deferral of Sales and Use Tax Exemptions are available California – Interstate Commerce Arizona – Rental & Leasing Exemption,

Occasional Sale Exemption Planning is critical to claim any exemption

Arizona – Rental & Leasing Exemption Purchase of the plane tax exempt Sales tax to be paid on monthly rental

revenues Fair market value rental rate – monthly or

hourly Deferral of sales tax

Arizona – Casual Sale Exemption “Garage sale” exemption Purchase between individuals What if LLC is involved? What if seller is a leasing company? Be very careful claiming this exemption

An initial interview to discuss some general background information, how the aircraft will be used, etc.

Review income tax returns Formulate the initial plan Discuss the plan with client and advisors (CPA, Attorney,

spouse, etc.) Implement the plan: entity setup, documentation creation,

sales tax compliance, etc. Continual, ongoing monitoring during the three-year

engagement period.

What is the engagement process?

Contact information www.aviationtaxconsultants.com Office 800-342-9589 Daniel Cheung 317-716-3388 (cell) daniel@aviationtaxconsultants.com Fred McCarter 812-371-5322 (cell) fmccarter@aviationtaxconsultants.com