It’s nearly impossible to get quick answers when it comes to aviation tax questions. Everybody seems to be afraid of providing “generic” tax information since it might not apply in all cases. So I’ll try to share what I’ve found. Keep in mind, I’m not a tax expert, so use this information with a grain of salt (and consult an aviation tax expert):
- If you plan to use your airplane mostly for business (> 50%), you can buy it in a wholly owned subsidiary for your business to maximize tax benefits. This new business would essentially be in the business of “renting” its only aircraft to you or your business.
- Once you have the airplane under the business, each hour the plane is used must be “rented” from your new entity. Generally, the rental is either by your business (for business use) or by you (for personal use). Your aviation tax expert can prepare the rental agreements and rates for you. In this arrangement, your new business would have a small amount of revenue.
- While airplanes are frequently financed on 20-year terms, they can be depreciated on a 5-year schedule and each depreciation dollar would essentially be an expense of this new entity.
- Additionally, the finance charges of the loan as well as maintenance costs of the plane are all expenses to the business entity.
- The expected outcome is that the new entity would have a substantial operating loss (mostly due to depreciation in the first 5 years). Since these losses would negatively impact your income, you wouldn’t pay income taxes on the depreciation of the aircraft and other expenses (although you do pay taxes on the rental revenue, which is substantially less). Depending on your tax bracket and income, you could save X% of the purchase price of the airplane in a 5-year period, where X = [Your Top Tax Rate]. In some cases, this could be as high as 40%! That’s pretty incredible savings. In fact, if you finance your plane on a 20-year loan, and you are in the 40% tax bracket, it’s possible to be upside down in the first 5 years (meaning you save enough money on taxes to make all the payments and then some). After 5 years though, you’re on your own, so plan ahead for the following 15 years too. Nobody said this was going to be cheap! Also, keep in mind that if you don’t make more money than the depreciation expense of your plane, your tax benefit will be limited.
- Section 179 depreciation guides for small businesses with less than $500,000 in assets also allow for even faster depreciation of the plane. Up to an additional $125,000 of depreciation, although this is combined with any other assets the company has. Also, this depreciation expense starts to go away after a business has $500,000 in combined assets, making the purchase price of an airplane relatively important if you want to take advantage of this additional benefit.
- There are State-Specific Aviation tax guidelines that can greatly impact your purchase. I don’t know any of them, so do your own research.
There is a significant tax benefit of owning a plane for business. The savings are driving more and more businesses to own aircrafts. It was the final straw to convince me to go ahead and make the plunge for my business.
One additional tax issue to consider is the timing of your purchase. If you purchase an aircraft prior to September 30th of a given year, the depreciation schedule is more favorable than if you make your purchase after September 30th. It’s something along the lines of 20% instead of 5%. Although that’s partially offset by the depreciation in subsequent years for those who purchase after September 30th, so keep the September 30th time in mind when making a purchase.
A great source of information and a potential tax advisor is a company called Aviation Tax Consultants.