aircraft tax planning & impact on budgeting for flight...
TRANSCRIPT
Aircraft Tax Planning & Impact On
Budgeting For Flight Departments
Presented by: Alan Goldstein
Citi Corporate Aviation
NBAA Live Webinar | June 19, 2012
2
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Live NBAA Webinar June 19, 2012
3
CITIGROUP CORPORATE AVIATION 79 TOWER ROAD HANGAR E
WESTCHESTER COUNTY AIRPORT WHITE PLAINS, NY
(212) 559-4812 Alan Goldstein is a CPA and has an MBA in Taxation. He is employed as The Director of Finance for Citigroup Executive Services in their New York corporate headquarters. He also is a member of Citigroup’s flight department management team, where his responsibilities include overseeing all of the aviation department’s accounting and bill payment functions. In addition to his financial responsibilities, he has purchased or sold approx. 40 jet powered aircraft over the years and he insists that Citi has come out ahead on all of the transactions. Alan is a Past Chairman of the NBAA Tax Committee and has been a guest speaker at NBAA Tax Conferences and Forums. He has served as an advisor to many of our NBAA members on accounting and tax issues, such as excise tax audits and personal use of aircraft.
Live
NBAA
Webina
r June
19,
2012
• DISCLAIMER
This presentation is intended to provide general information about aviation
regulations, taxes, depreciation, accounting, budgeting and related issues. Such
information should not be relied upon as a substitute for accounting, legal or tax
advice from an experienced advisor, who has applied the applicable rules to the
specific facts and circumstances of your particular situation. You should ask your
chosen advisor to provide you with advice in a form that you can rely upon before
you acquire or operate an aircraft or enter into any transaction. Information
contained herein and any information that you have otherwise received from us
was neither intended nor written to be used and cannot be used for the purpose
of avoiding tax penalties under U.S. law or for promoting, marketing or
recommending to another party any tax related matters.
4
Alan Goldstein NBAA Webinar June 19,
2012
Topics to be Reviewed & Covered
1. FAA Aircraft Operating Structures
2. Tax & Accounting Depreciation Concepts for Corporate Aircraft
3. Fixed & Operating Costs
4. Heavy Maintenance Expenditures
5. Sales Taxes
5 Alan Goldstein NBAA Webinar June 19, 2012
Introduction
• Overall Purpose of this Presentation – To Introduce
FAA Structure Concepts and Considerations
– Private [FAR Part 91]
• Part 91 Special Purpose Entity Prohibition
– Charter [FAR Part 135]
– Hybrid of Part 91 & 135
Live NBAA Webinar May 1, 2012
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Part 135
• Most aircraft owners who wish to have their aircraft available for
charter lease the aircraft to an existing charter operation
• HYBRID 91-135: Lease the aircraft to a charter company BUT
the aircraft owner retains the right to operate the aircraft under
FAR Part 91 for their own use
Live NBAA Webinar| May 1, 2012
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FARs vs. IRS RULES - Commercial • The FAA and the IRS do not speak the same language
• However, this may not be a bad thing
• IRS Revenue Ruling 78-75
– The IRS does not consider the FAAs definition of a commercial operator determinative in deciding which taxes apply (excise or fuel
taxes , depreciation schedules, etc.). • FAA (Profit IS a motive, “Holding Out”)
• IRS (Profit is NOT a motive)
• Safety vs. Economics
8 Alan Goldstein NBAA Webinar June 19,2012
CONTROL
• FAA Operational control
– Exercise of authority over -- Initiating,
Conducting, or Terminating a flight
• IRS Possession, Command and Control
– Possession => Ownership, Lease, Insurance
– Command => Scheduling, Availability
– Control => Pilots, who has aircraft use
9 Alan Goldstein NBAA Webinar June 19,2012
INCOME TAX BASICS
• Aircraft ownership and operation can generate
beneficial federal & state income tax advantages
– Tax advantages limited to actual business
use of aircraft
– No tax advantages where an aircraft is acquired
or operated for personal purposes or otherwise
not incidental to the business of the taxpayer
Live NBAA Webinar May 15, 2012
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Part 1: Aircraft Acquisition and
Operations
General Concepts • Many aspects of business aircraft ownership and operation are
subject to federal and state income taxes
• Certain costs related to aircraft operations are treated as “ordinary and necessary” expenses under IRC §162 for which a deduction is allowed in the year of payment
– Must be appropriate for carrying on taxpayer’s business and reasonable in amount
– Costs that are expensed do not impact the tax basis, discussed below
• The cost of purchasing an aircraft and some major repair costs must be capitalized, meaning that the costs are added to the tax basis and allowed to be depreciated over time
• From a time value of money perspective, expense deductions are better than depreciation because you get the benefit sooner
11
Jeff Towers NBAA Webinar May 8, 2012
Deductible Expenses:
Currently Deductible vs. Capitalized
Costs vs. Non-Deductible
• Deductible Expenses
• Non-Deductible Expenses
• What is a Deductible Expense?
– “Ordinary and necessary expenses paid or
incurred during the taxable year in carrying
on any trade or business.”
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General Concepts
• A starting point for discussion of depreciation is the concept of tax basis
• Tax basis equals the original purchase price of an aircraft, less one time adjustments for 1031 exchanges, section 179 deductions and bonus depreciation, less annual adjustments for regular depreciation, plus the cost of capital improvements by the taxpayer
• Tax basis is used to determine:
– the amount of the allowable annual deductions and
– the amount of taxable gain or loss on a sale
• difference between the adjusted tax basis and the sales price
13 Jeff Towers NBAA Webinar May 8, 2012
Tax Depreciation
• A business aircraft owner is allowed an annual deduction on its
income tax return for depreciation
– business aircraft are used in a “trade or business” and are
subject to “exhaustion, wear and tear, and obsolescence”
over time (IRC §167)
• Depreciation deductions reduce the tax basis on a dollar for
dollar basis until the basis has been reduced to zero
• Depreciation deductions are only allowed on the business use of
an aircraft
– Transporting taxpayer’s own personnel and property
– Leasing without crew
– Commercial or contract carrying of passengers or freight
14
Jeff Towers NBAA Webinar May 8, 2012
Depreciation Method
• IRC §168(b) provides that business aircraft are depreciated using one of two methods:
– Modified Accelerated Cost Recovery System, generally referred to as MACRS, and
– Alternative Depreciation System, generally referred to as ADS or straight line depreciation
• MACRS used to calculate depreciation unless disqualified for reasons below
• MACRS deductions are weighted heavily in the first few years of ownership
– Time value of $ benefit
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Jeff Towers NBAA Webinar May 8, 2012
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The Modified Accelerated Cost Recovery System (MACRS) is mandatory
for most tangible depreciable property placed in Service after December 31,
1986. Property is depreciable if it wears out, has a determinable life that
exceeds one year, and is used in a trade or business or for the production
of income.
Alan Goldstein NBAA Webinar June 19,2012
MACRS Schedules: Recovery Period
• One of two MACRS schedules could apply to
business aircraft
– 5-year MACRS: Fixed wing aircraft (except those
used for commercial or contract carrying of
passengers or freight) and all helicopters
– 7-year MACRS: All aircraft used for commercial or
contract carrying of passengers or freight except
helicopters
• If aircraft use falls partially in each category, the
MACRS schedule for the predominant use (more than
50%) applies
– If aircraft is leased, look through to lessee’s use to
determine predominant use
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Jeff Towers NBAA Webinar May 8, 2012
Qualifying for MACRS • Under IRC §280F aircraft must be predominantly used (more
than 50%) for a “qualified business use”
– Use in a trade or business of the taxpayer
• Could be Part 91, Part 135 or a combination
– If qualified business test not met taxpayer must depreciate
using straight line
• Caution!: Certain business uses of aircraft do not count as a
qualified business use unless other qualified business uses
comprise at least 25% of the aircraft use in each year
– Lease to 5% or more owner or related party
– Use of aircraft as compensation to 5% or more owner or
related party (i.e. – personal use)
– Use of aircraft as compensation by anyone who is not a 5%
or more owner or related party unless income tax is paid (e.g.
– using SIFL rates)
• Aircraft must be predominantly used (more than 50%) in U.S.
18
Jeff Towers NBAA Webinar May 8, 2012
Qualifying for MACRS
• If aircraft is used for non-qualifying use (such as
personal use) in any year during the depreciation
period, the depreciation deduction for that year is
reduced by the percentage of non-qualifying use, but
the tax basis is reduced by the full amount
• If use of an aircraft fails to satisfy the predominant use
tests for business use or U.S. use in any year during
the depreciation period, MACRS no longer applies
and any prior deductions which exceed the amounts
allowed under straight line depreciation must be
“recaptured”
– Tax on recaptured amount becomes due
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Jeff Towers NBAA Webinar May 8, 2012
Straight Line Depreciation - Tax
• Used to calculate depreciation when MACRS doesn’t apply (e.g.
– 50% or more non-business use or 50% or more non-U.S. use)
• Equal deductions each year during the depreciation period
• One of two straight line schedules will apply to business aircraft
– 6-year straight line: Fixed wing aircraft (except those used for
commercial or contract carrying of passengers or freight) and
all helicopters
– 12-year straight line: All aircraft used for commercial or
contract carrying of passengers or freight except helicopters
• Correct category for mixed use aircraft is determined in the same
manner as discussed above with MACRS
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Jeff Towers NBAA Webinar May 8, 2012
Conventions • Conventions are used to determine the amount of depreciation
that can be taken the first year, which also affects the
depreciation amounts in subsequent years
• Half Year Convention: an aircraft purchased anytime before the
end of the taxpayer’s 3rd quarter will be treated as if it had been
purchased in the middle of the year
• Mid-Quarter Convention: an aircraft purchased anytime during
the taxpayer’s 4th quarter will be treated as if it had been
purchased in the middle of the quarter, assuming that 40% or
more of all MACRS property purchased by the taxpayer was
acquired in the 4th quarter
21
Jeff Towers NBAA Webinar May 8, 2012
Calculating Depreciation - Tax
• Need to determine
– Depreciation method
– Recovery period
– Convention
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Jeff Towers NBAA Webinar May 8, 2012
5/7 MACRS
Mid-Quarter Convention
Placed in Service in Fourth
Quarter
Year
1
2
3
4
5
6
7
8
5-Year
20.00%
32.00
19.20
11.52
11.52
5.76
7-Year
14.29%
24.49
17.49
12.49
8.93
8.92
8.93
4.46
5/7 Year MACRS
Half-Year Convention
Year
1
2
3
4
5
6
7
8
5-Year
5.00%
38.00
22.80
13.68
10.94
9.58
7-Year
3.57%
27.55
19.68
14.06
10.04
8.73
8.73
7.64
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Jeff Towers NBAA Webinar May 8, 2012
Straight Line Method
Half Year Convention
Straight Line Method
Mid-Quarter Convention
Placed in Service in Fourth
Quarter
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
6
8.33%
16.67
16.67
16.67
16.66
16.67
8.33
12
4.17%
8.33
8.33
8.33
8.33
8.33
8.34
8.33
8.34
8.33
8.34
8.33
4.17
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
6
2.08%
16.67
16.67
16.67
16.66
16.67
14.58
12
1.04%
8.33
8.33
8.33
8.33
8.34
8.33
8.34
8.33
8.34
8.33
8.34
7.29
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Jeff Towers NBAA Webinar May 8, 2012
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IRS Depreciation @ 5 YR. Life
$2.0 million interior & avionics
Year 5 Yr Life Dep deduction
1 20.00% $400,000
2 32.00% 640,000
3 19.20% 384,000
4 11.52% 230,400
5 11.52% 230,400
6 5.76% 115,200
total $2,000,000
Alan Goldstein NBAA Webinar June 19, 2012
Depreciation Tax - Definition
Depreciation – Tax is the annual deduction
allowed to recover the cost or other
basis of business property with a useful
life of more then one year.
26 Alan Goldstein NBAA Webinar June 19, 2012
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Depreciation - Accounting is a system which aims to
distribute the cost or other basic value of tangible
assets, less any salvage value over the estimated
useful life of the asset in a systematic and rational
manner.
Straight line depreciation is the most widely used
method.
ACQUISITION COST - ESTIMATED SALVAGE VALUE = DEPRECIATION CHARGE
ESTIMATED USEFUL LIFE IN PERIODS FOR EACH PERIOD
EXAMPLE:
$2,200,000 - 200,000
___________________ = $200,000 per year
10 years
Alan Goldstein NBAA Webinar June 19, 2012
Depreciation Tax & Book $ Comparison
• Tax Deduction
$13,500,000 asset / 5 years = $2,700,000 average per year
• Book Deduction
$13,500,000 - $0 salvage / 20 years = $675,000 per year
28 Alan Goldstein NBAA Webinar June 19, 2012
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AIRCRAFT OPERATING COSTS
DEPRECIATION ALTERNATIVES
($ 000's)
5 YRS 7 YRS 10 YRS 12 YRS 16 YRS 20 YRS
TOTAL DIRECT COSTS 712 712 712 712 712 712
TOTAL FIXED COSTS w/o dep. 723 723 723 723 723 723
DEPRECIATION ($13.5 million aircraft) 2,700 1,929 1,350 1,125 844 675
TOTAL FIXED COSTS 3,423 2,652 2,073 1,848 1,567 1,398
TOTAL COSTS 4,135 3,363 2,785 2,560 2,278 2,110
Alan Goldstein NBAA Webinar June 19, 2012
Direct & Fixed Costs - Definitions
• Direct Costs -
- Costs that are directly related to the operation of the aircraft. They are
variable in nature. Costs increase as usage increases, if no usage then
no cost. Examples include fuel, maintenance, crew T&E, catering, etc.
• Fixed Costs -
- Costs which remain fixed and are not dependant on volumes or
usage. Examples include salaries, hangar and airplane leases,
insurance, depreciation, etc.
32 Alan Goldstein NBAA Webinar June 19, 2012
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AIRCRAFT OPERATING COSTS
DEPRECIATION ALTERNATIVES
5 YEARS 7 YEARS 10 YEARS 12 YEARS 16 YEARS 20 YEARS
DIRECT COSTS
FUEL 340,000 340,000 340,000 340,000 340,000 340,000
MAINTENANCE LABOR 70,000 70,000 70,000 70,000 70,000 70,000
MAINTENANCE PARTS 113,500 113,500 113,500 113,500 113,500 113,500
ENGINE OVERHAUL RESERVES 75,000 75,000 75,000 75,000 75,000 75,000
AIRCRAFT TRIP EXPENSE 45,000 45,000 45,000 45,000 45,000 45,000
CREW TRIP EXPENSE 68,000 68,000 68,000 68,000 68,000 68,000
TOTAL DIRECT COSTS 711,500 711,500 711,500 711,500 711,500 711,500
FIXED COSTS
SALARIES AND BENEFITS 378,000 378,000 378,000 378,000 378,000 378,000
HANGAR RENT 75,000 75,000 75,000 75,000 75,000 75,000
INSURANCE 48,000 48,000 48,000 48,000 48,000 48,000
CREW TRAINING 53,000 53,000 53,000 53,000 53,000 53,000
AIRCRAFT UPGRADE RESERVES 40,000 40,000 40,000 40,000 40,000 40,000
INTERIOR REFURBISHING RESERVES 29,000 29,000 29,000 29,000 29,000 29,000
OTHER FIXED COSTS 100,000 100,000 100,000 100,000 100,000 100,000
TOTAL FIXED COSTS 723,000 723,000 723,000 723,000 723,000 723,000
DEPRECIATION ($13.5 million aircraft) 2,700,000 1,928,571 1,350,000 1,125,000 843,750 675,000
TOTAL FIXED COSTS 3,423,000 2,651,571 2,073,000 1,848,000 1,566,750 1,398,000
TOTAL COSTS 4,134,500 3,363,071 2,784,500 2,559,500 2,278,250 2,109,500
35
Falcon 900EX 800 hours
Item Notes Quantity Cost
Avantex FAR Library $ 76.00
APU St/Gen O/H 1 $ 2,500.00
Bat Annual Check Page, Jet Pak $ 1,325.00
Bulbs $ 1,500.00
Bulletins $ 12,000.00
Cabin Interior Repairs Misc. Repairs $ 7,000.00
Coalescer Socks 2 $ 1,250.00
Contract APU MSP 1/1/12 - 12/31/12 (Nov 11) $ 13,500.00
Contract CAMP 4/1/12 - 3/31/13 $ 9,500.00
Contract MSP 800Hr X $146 X 3 $ 350,400.00
Contract VS Cleaning $ 44,652.00
Eng St/Generator O/H 4 $ 10,000.00
Engine R&R MPI 2500 Eng Hr (Aug ?) 3 $ 12,500.00
Pylon Insp At Eng R&R 2 $ 500.00
36
Falcon Revisions Paper, CD $ 2,750.00
Filters / Gaskets Water 4 $ 1,300.00
Fire Bottle Hydro 7 $ 3,020.00
Fire Bottle Cartridges 11 $ 9,100.00
Hardware Replacement Misc. $ 2,000.00
Hydraulic Oil Sample 2 $ 800.00
Inst Rep $ 15,000.00
Life Vest Recert. 15 $ 255.00
Oil / Hyd 2 cases / 2 cases 4 $ 800.00
Oxy / Nit 1 of each refilled twice $ 820.00
Pitot / Static Checks FAR 91.411 Checks $ 1,400.00
Raft Recertification Insp. And Repair 2 $ 2,000.00
Smoke Hoods Recert. ~
Survival Bags Replacement ~
Tool Rental (Special Insp) $ 2,500.00
Transponder Updates 2 ~
Wheel Main Inspection / NDT 10 $ 4,500.00
Wheel Nose Inspection / NDT 2 $ 1,400.00
Wheel Tires $ 10,500.00
Total $ 524,848.00
37
Hangar Facility Costs
Item Notes Quantity Cost
Air Hoses $ 200.00
Brooms $ 80.00
Boots, Rubber $ 250.00
Contract AIS Station License $ 1,000.00
Contract AIS Inventory $ 3,410.00
Contract Cleaning $ 44,652.00
Cleaning/TempHelp/Supplies $ 4,500.00
Clothing $ 3,800.00
Drop Lights 4 $ 650.00
Elect. Supplies Fclty $ 2,000.00
Equipment Calibration $ 10,000.00
Equipment Oil / Fuel $ 1,400.00
Equipment Parts / Service Tugs/Vehicles $ 6,400.00
Extension Cords 6 $ 225.00
Exterminator $ 1,500.00
38
Fire System Annual Check ISS $ 2,200.00
Fire Extinguisher Inspections OSP $ 600.00
Garbage Collection Suburban $ 8,500.00
Golf Cart Upkeep $ 500.00
Hangar Doors Yearly P/Maint Insp/Lube $ 12,000.00
Hangar Drains Cleaning Safety Kleen $ 800.00
Hangar Water Filter Cartridges $ 300.00
Lawn Care $ 1,000.00
Medical Supplies $ 500.00
Oxy / Acet Bottle Lease $ 400.00
Paint Supplies $ 125.00
Safety Equipment, Supplies $ 1,800.00
Sheet Metal Tooling $ 900.00
Sprinkler Quarterly Checks $ 1,800.00
Tool Overhaul $ 9,000.00
Tug (North Western 120) (Older Tug) Upgrade Front Axel 1 $ 4,000.00
Waste Service Safety Kleen $ 6,400.00
Waste Battery Disposal $ 650.00
Work Shoes $ 1,800.00
Total $ 133,342.00
NOTE:
Phase II Construction $ 750,000.00
39
Spare Parts Inventory
• Small dollar items expensed when purchased
• Larger dollar items capitalized on balance sheet as a pre-paid
expense then begin depreciating when installed, but difficult to
keep track of old and replacement parts so many companies
disregard and immediately expense.
Alan Goldstein NBAA Webinar June 19, 2012
41
FALCON 900EX N711AG
Consolidated Line Item Expense
($M)
JAN FEB MAR APR TOTAL
Plan Plan Plan Plan Plan
- - - - -
Salaries & Fringe 57 57 59 59 704
- - - - -
Total Compensation 57 57 59 59 704
- - - - -
Insurance 33 -- -- 33 174
T & E 17 17 17 17 204
Memberships/Subscriptions 2 1 2 2 22
Printing/Supplies/Postage 1 -- -- -- 4
depreciation / aircraft 118 118 118 118 1,416
depreciation / furniture & equipment --
42
aircraft scheduled maintenance 26 12 12 22 181
engine overhaul expense / reserve 29 29 29 30 350
communications expense 2 2 2 2 24
training 9 8 9 9 105
aircraft fuel 43 43 43 43 516
a/c landing & handling 20 20 20 20 240
food & catering 4 4 4 4 48
All Other Expense 4 4 4 4 48
- - - - -
Total Other Operating 308 258 260 304 3,332
- - - - -
Total Expenses 365 315 319 363 4,036
= = = = =
43
MAINTENANCE DEPARTMENT
Consolidated Line Item Expense
($M)
JAN FEB MAR TOTAL
Plan Plan Plan Plan
Salaries & Fringe 130 130 150 1,760
Total Compensation 130 130 150 1,760
T & E 2 2 2 24
Memberships/Subscriptions --
Printing/Supplies/Postage 1 1 1 12
depreciation / furniture & equipment 4 4 4 48
aircraft scheduled maintenance 4 4 4 48
training 10 -- 10 90
All Other Expense 3 3 3 36
Total Other Operating 24 14 24 258
Total Expenses 154 144 174 2,018
direct staff 10 10 10 10
fte 13 13 13 13
44
HANGAR EXPENSE
Consolidated Line Item Expense
($M)
JAN FEB MAR TOTAL
Plan Plan Plan Plan
- - - -
- - - -
Total Compensation -- -- -- --
- - - -
Premises - rent & TAXES 49 32 32 418
premises - depreciation 30 30 30 360
premises - expenses 44 7 23 231
depreciation / furniture & equipment 5 5 5 60
communications expense 7 7 7 84
45
All Other Expense 5 5 5 60
- - - -
Total Other Operating 140 86 102 1,213
- - - -
Total Expenses 140 86 102 1,213
= = = =
cost of funds (7) (8) (8) (107)
- - - -
total revenue (7) (8) (8) (107)
end of period assets 3,305 3,270 3,235 2,920
Monthly Interest rates 0.2150% 0.2350% 0.2433%
46
Understanding the IRS’s
Position on Capitalizing vs.
Expensing Heavy Maintenance
• IRS auditor’s mission is to generate taxes.
• In issues of capitalizing vs. expensing for tax purposes, IRS
will tend to opt for capitalizing
Alan Goldstein Live NBAA Webinar June 19, 2012
Expensing and Capitalization Guidance • Revenue Ruling 2001-4 addressed treatment of costs of a “heavy
maintenance visit” (HMV) that would reoccur several times over the
useful life of a commercial aircraft
– Included removal of engines, landing gear and interior, repainting,
addressing service bulletins and airworthiness directives, extensive
repair and replacement of minor parts “for the purpose of preventing
deterioration of the inherent safety and reliability levels”
– Three scenarios:
• HMV but no material upgrade, addition or replacement of major
structural component = expense
• HMV + replacement of significant number of skin panels to
address severe corrosion = panel costs capitalized (materially
added to the value) and other costs expensed
• HMV with extensive work to extend useful life = all capital
expenditures. Work constituted a “restoration”. Done in
conjunction with replacement of major components as part of a
“plan of rehabilitation” 47
Jeff Towers NBAA Webinar May 8, 2012
General Rules for Expensing and
Capitalization of Repair Costs
• The cost of “incidental repairs” which do not materially increase
the value of the aircraft or substantially prolong its life, but just
keep it in “ordinary efficient operating condition” can be
expensed (IRS Reg. §1.162-4)
• The cost of repairs which add to the value of the aircraft,
substantially prolong its useful life or adapt it to a different use
must be capitalized (IRS Reg. §1.263(A)-1)
• The above concepts seem straightforward, but create challenges
when applied to the complex maintenance requirements of
aircraft
– Example: An engine shop visit (ESV) will be repeated multiple times
over the useful life of an aircraft, but each time the resulting repair
work can be quite substantial and expensive
48
Jeff Towers Live NBAA Webinar May 8, 2012
Expensing and Capitalization Guidance
• The court in the FedEx case concluded that the first 3 factors
were satisfied and even though the engines were sometimes
removed for servicing, that wasn’t sufficient for the engine by
itself to be treated as the relevant unit of property
• Court then looked at whether the ESV repairs were “incidental
repairs” that could be expensed or whether the costs should be
capitalized
• Relies on the “Plainfield-Union” test – if a repair merely restores
an aircraft to its condition after the last ESV and does not
increase the value, usefulness or life of the aircraft the cost is
deductable as an expense
49
Jeff Towers Live NBAA Webinar May 8, 2012
Expensing and Capitalization Guidance
• FedEx Case involved ESVs in which engines were swapped out
with a temporary replacements
• Court looked at whether the entire aircraft or only the engine
should be the focus in deciding whether a repair materially adds
to the value or appreciably prolongs the life – four factors:
– Does the taxpayer and the industry treat the engine as part of
the aircraft for regulatory, market and accounting purposes?
– Is the economic useful life of the engine coextensive with that
of the aircraft?
– Can the engine and the aircraft function without the other?
– Can and is the engine maintained while affixed to the
aircraft?
50
Jeff Towers Live NBAA Webinar May 8, 2012
Expensing and Capitalization Guidance
• IRS issued proposed and temporary regulations in December
2011 replacing the proposed regulations from 2008
• Components are treated as one unit of property for the purpose
of determining whether repair costs should be expensed or
capitalized if they are “functionally interdependent”
• Regulations include a “safe harbor” for routine maintenance
– The cost of repairs which taxpayer reasonably expects to
perform more than once during the class life (6 or 12 years
for business aircraft) to keep property in “ordinarily efficient
operating condition” are expensed
51
Jeff Towers Live NBAA Webinar May 8, 2012
Expensing and Capitalization Guidance
• Exceptions to routine maintenance safe harbor
– Property has “deteriorated to a state of disrepair where it is
no longer functional for its intended use”
– If costs are incurred by taxpayer which relate to a prior
owner’s use, then those costs are not subject to the safe
harbor and must be capitalized if the repair constitutes a
“betterment”
• Ameliorates a material condition or defect that existed
prior to taxpayer’s acquisition or
• Results in a material addition or
• Results in a material increase in capacity
52
Jeff Towers Live NBAA Webinar May 8, 2012
53
Airframe Maintenance Expense:
Revenue Ruling 2001-4; Rules for
deducting costs of heavy maintenance
visit (HMV):
• Performance of HMV necessary to comply with FAA directive, that is not material upgrade, or replacement of major component, may be expensed.
• Additional work materially adding to the value of the airframe must be capitalized
• IRS states “Plan of Rehabilitation Doctrine” – implies that improvements to extend the life of the airframe must be capitalized.
Alan Goldstein Live NBAA Webinar June 19, 2012
54
Ingram Industries,
TCM 2000-323:
IRS permitted taxpayer a current deduction for the costs of
extensive scheduled maintenance of the engines of its fleet of
the tugboats
Alan Goldstein Live NBAA Webinar June 19, 2012
55
Engine Maintenance Expenses: IRS
TAM 9618004; states that “major
inspections” may not be expensed, but
treated as capitalized and depreciated
over their useful life.
• Example IRS used was a hot section.
• IRS position was that the inspections resulted in
substantial increase in the value & life of the engine.
• IRS said it was more in nature of capital expenditure.
• Although not binding on other taxpayer’s TAM
indicates IRS’s position on engine maintenance.
Alan Goldstein Live NBAA Webinar June 19, 2012
SALES TAX
• Imposed at the point of sale
• Tax rate can range from 2-10% of purchase price
• Many sales tax friendly states:
– Oregon – no sales tax
– New Hampshire – no sales tax
– Montana – no sales tax
– Connecticut – exemption for aircraft with maximum takeoff weight of
6,000 pounds or more
– Massachusetts – blanket exemption for aircraft
– Rhode Island – blanket exemption for aircraft
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Live NBAA Webinar May 15, 2012
USE TAX
• Applies to property stored, used or consumed in the state
• Sales and use taxes are mutually exclusive
• Use tax rate = sales tax rate
• Tax rate depends on where aircraft is habitually situated
• Use tax can be assessed by more than one state
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Live NBAA Webinar May 15, 2012
EXEMPTIONS
• Resale exemption
• Commercial exemption
– California – separate exemption for interstate commerce
and common carrier
– Maryland – interstate commerce
– Kentucky, Georgia and Nebraska – combine interstate commerce
and common carrier requirements
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Live NBAA Webinar May 15, 2012
EXEMPTIONS
• Commercial exemption (cont’d)
– Nevada – Only Part 121 operators
– New York – Limited to aircraft used primarily to transport persons or
property for hire and/or used by aircraft purchaser to transport
tangible personal property in the conduct of its business.
Transportation services to affiliates don’t count in the “primarily
used” calculations for this exemption.
• Related party exemption
• Occasional sale exemption
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Live NBAA Webinar May 15, 2012
DOCUMENTATION FOR EXEMPTIONS
• General Documents Required
– Fully executed aircraft purchase agreement
– Aircraft bill of sale
– Aircraft delivery receipt
– Flight Logs
– Maintenance Logs
– Insurance Policy
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Live NBAA Webinar May 15, 2012
WATCH OUT FOR THE FOLLOWING
• Taking delivery in a sales tax free state does not mean you have
no use tax liability
• Being assessed use tax in one state doesn’t
mean it won’t happen again in another state
• Corporations can be residents of more than
one state and owe use tax in multiple states
• Registration of aircraft in sales tax friendly state will not stop
other states from assessing use tax
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Live NBAA Webinar May 15, 2012
Questions for Today’s Presenter?
Live NBAA Webinar June 19, 2012
Alan Goldstein Citigroup Executive Services
79 Tower Road White Plains, NY 10604 phone: 212-559-4812
fax: 212-793-0370 [email protected]
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