Discussion:Tax implications for business that owns aircraft

Is the plane an ordinary and neccessary expense? Documenting business purpose and use are very very important in this case. You might also have problems with Sec 274 if the plane can in anyway be considered a "facility used in connection with entertainment." There are also large hobby v business issues too.

I think in general you'd want to avoid rentals of personal type property.

As TinCook says, the flight log is key; keep very detailed records of personal & entertainment use vs. business use. A client purchased an aircraft several years ago and there was some legal way they could avoid sales tax by taking delivery in a neighboring state. In Texas, there is a sales tax exemption for aircraft purchased in another state and brought into Texas for commercial use. You might check the rules in OK to see if you have some sort of similar exemption.

There's a good summary of rules here: [1]

An LLC (or corp) will not serve any purpose liability-wise, because the pilot of aircraft is responsible not to be negligent. Its only advantage would be where others fly the plane, such as an employee or co-owner. An airplane mechanic might fly it now and then, and nothing wrong with said person flight-testing his own wrench work. However, a pax would not be aboard, and any property damage would be covered by insurance (unless he destroyed a business jet on the ramp).

The advantage of owning it personally is an accountable plan. If not that fancy an airplane, the GSA reimbursement rate of $1.07/statute mile might cover costs, with no accounting to be done. Technically, we can't use the GSA rate, but IRS workers and Tax Court Judges are reimbursed that way, so it's hard to imagine IRS raising the issue. If they did, do the accounting for them. They'll balk at a 1040 refund if it comes out more than $1.07, converting hours to miles.

Otherwise, a cost computation is same as 2106, except hours instead of miles. We can compute a projected annual per-hour cost, and cut checks to employee who turns in flight hours. Periodically, and at least near year-end, do the actual computation and settle up on reimbursement.

These days "ordinary and necessary" shouldn't be a problem, unless this thing is like a King Air 200 twin turboprop. Unless we travel mainly between big cities. Like, for me to go to a small place in PA on my preferred carrier, but it also means their code-share partners too, the time and cost is laughable. One hour drive to Cleveland, fly to Detroit, then plane change to Pittsburgh, then a little Saab 340 to destination. Takes most of the day. To go there in my slowish airplane is less than an hour.

When I flew the plane for IRS to Cincy as a common place to go, I could beat American Airlines. This was due to their schedule then before Cincy was a huge hub, and also the fact they spend too much of the flight below 10,000, where FAA limits your speed. Tortoise and hare. Add 9/11 and current flight-delay issues, one's advantage in private aircraft travel can extend to 400-mile trips, even at a lowly 120 knots.

He made two business trips and that was all, both to track down the subject of his next novel. On both trips the plane iced up; he put it up for sale and finally unloaded it this year at 425K. The smaller plane is for sale, and is not used. He has 90K invested in it. As he said to me, "I must have been out of my freakin' mind; if I ever ask about an airplane again, shoot me.'

I realize the OP's question is different, but this moral, to think twice before buying a plane, is still a good one.

The key case for ordinary and necessary is Robert Noyce, one of the founders of Intel.

"...On the other hand, the Tax Court and other federal courts have disallowed aircraft expenditures in cases where it was possible to reproduce the executive's schedule on commercial airlines with little or no impact on productivity, where the costs of aircraft use are unreasonable in relation to alternatives, or where the localized nature of a business and the aircraft's infrequent use makes it unlikely that the aircraft would add value to the company. The key to achieving deductibility, in this area, is to build the strongest case possible for the aircraft as a contributor to bottom line profitability. It may also help to gather intelligence on what competitors are doing with their aircraft. Such information could be used to support the argument that the aircraft use is “ordinary.”..." -Keith G. Swirsky, MAXIMIZING FEDERAL TAX DEDUCTIBILITY OF AIRCRAFT OPERATING EXPENSES available [here]

As long as you got the horsepower to give an extra 10# of thrust draggin' a 100# worth of banner drag in a pickup on the edge of a stall. FAA grants banner draggers "Restricted Cert" for the operation but not the brass in the genitalia. A banner pickup is a true sight to behold.

I know O/T, but a banner-tow guy I know was doing two banners w/o his ground crew, so I helped him set both up for pickup. One was for a festival installing a new Pastor at the nearby Catholic Church. "WELCOME FATHER JOHN." The other was to banner-drop and do a pickup -- he was good enough to do a drop and pickup in one pass over the grass adjacent the runway -- for a local rock group to fly over the joints in the riverside "flats" of Cleveland, announcing "THREE PENNY PUSSY" and where there. He missed his first and 2nd pass with grappling hook many feet behind him, easy to do but rare for him. So probably embarrassed and a little nervous. On 3rd pass, he picks up, headin' southeast for the Church. The urge was just too much, and I went to my plane and on the bird's radio, told him "You picked up the wrong banner!" As gosh is my witness, a true story.

In a nut shell, when you start leasing, or charging for flights, you go from one section of the FAA rules to COMMERCIAL. I have been told that compliance with commercial certifications are very expensive.

The last one we were involved with, we had to retain a very expensive aviation attorney in a nearby big city to help structure the deal.

Flying solo can never violate any FAA rule in this regard, even if our leasing corp gives us a big W-2 to be the pilot.

This will all come out when you purchase the proper insurance for the plane. That is if you answer all the questions correctly on the insurance application. The consequence of course is that in the event the plane falls out of the air, and quesitons are not answered correctly, and you have not followed the FAA rules, bingo, no insurance.

The one thing the atty struck home with us was, he did not give a rats assts about the income tax consequence, if the entites were all one big happy family, if the same person owned this entity or that entity, or even which entity the pilot worked for, or if the pilot was an independent contractor, he did know who he could sue, and what records to prove his case.

We are not attorneys, that is why our client relied upon their advice.