A similar issue sometimes arises when a plane is sold in a state other than the owner’s resident state. Depending on applicable law, a state may take the position that the sale should be subject to state tax where the closing takes place, rather than the state in which the property was used (since, unlike most property – airplanes easily move from state to state). This issue can be easily avoided – so long as the sale has not already taken place.
Active vs. Passive Losses
Plane ownership frequently results in losses for tax purposes. This is due to a number of factors: high costs of maintenance, fuel, and pilots, accelerated depreciation and inconsistent usage. However, the ability to take losses relating to the lease of tangible personal property is not assured, even with a strong fact pattern. Accordingly, much of our work involves navigating through the passive loss rules to allow client to take a defensible position to treat losses as active losses (which often runs contrary to advice from any attorney concerned with personal or corporate liability). Other issues arise in using passive losses upon disposition of an airplane, if the new plane will be purchased to engage in the same activity.
Business vs. Personal Use
Whether the use of an airplane is a business or personal expense is a particular favorite of the IRS. This common audit issue requires substantial compliance by the taxpayer in keeping appropriate logs, evidencing business purpose of each trip and avoiding intermingling business and personal affairs.
Federal Excise Taxes
The IRS is currently aggressively imposing excise tax for any chartering/leasing arrangement that may impact existing leasing arrangements (as well as new transactions) based on recently issued guidance. With a tax rate of 7.5% of the transportation or fuel costs, careful planning is required to mitigate tax liability.
Every CEO I have ever represented cares very deeply about two things: not paying more taxes than required and avoiding unnecessary aggravation. Careful planning for airplane transactions will allow both of these goals to be accomplished.
David Rosen (firstname.lastname@example.org) is a CPA and tax attorney for Rosen, Sapperstein & Friedlander. RS&F is a business consulting and accounting firm based in Owings Mills, MD that serves middle market and high-net worth individuals throughout the mid-Atlantic and across the country.