tax planning for aircraft owners by daniel cheung, cpa aviation tax consultants, llc columbus,...
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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) [email protected] Fred McCarter 812-371-5322 (cell) [email protected]