Demystifying Aircraft Accountingand Budgeting

Presented by: Alan Goldstein, Citi Corporate AviationDave Weil, Flight Dept Solutions

Orlando, FL | October 31, 2012

Are you a Certified Aviation Manager or

interested in earning points towards your initial

application?

Today’s presentation is eligible for Certified AviationManager (CAM) Initial and Recertification points.

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Alan GoldsteinAlan 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 Yor k corporateheadquarters. He also is a member of Citigroup’s flight department management team,where his responsibilities include overseeing all of the aviation department’s accountingand bill payment functions. In addition to his financial responsibil ities, he has purchasedor sold approx. 40 jet powered aircraft over the years and he insists that Citi has comeout ahead on all of the transactions.

Alan is a Past Chairman of the NBAA Tax Committee and has been a guestspeaker at NBAA Tax Conferences and Forums. He has served as an advisor to many ofour NBAA members on accounting and tax issues, such as excise tax audits andpersonal use of aircraft.

LiveNBAA

Webinar June

19,2012

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personal use of aircraft.

Dave WeilDave is also a CPA and has an MBA in Finance & Marketing. Dave is the CEO of

Flight Dept Solutions, LLC, a business aviation consulting firm focused on assistingaircraft owners in many areas, including aircraft acquisition-related services, selecting ormonitoring management companies, establishing or supporting flight departments,financial management and EU ETS compliance.

Like Alan, Dave is a Past Chairman of the NBAA Tax Committee and has spokenat various NBAA events in the past. Previously Dave served in senior executive positionswith several prominent aircraft management companies, including TAG Aviation USA.

• DISCLAIMER

This presentation is intended to provide general information about aviationregulations, taxes, depreciation, accounting, budgeting and related issues. Suchinformation should not be relied upon as a substitute for accounting, legal or taxadvice from an experienced advisor, who has applied the applicable rules to thespecific facts and circumstances of your particular situation. You should ask yourchosen advisor to provide you with advice in a form that you can rely upon beforechosen advisor to provide you with advice in a form that you can rely upon beforeyou acquire or operate an aircraft or enter into any transaction. Informationcontained herein and any information that you have otherwise received from uswas neither intended nor written to be used and cannot be used for the purposeof avoiding tax penalties under U.S. law or for promoting, marketing orrecommending to another party any tax related matters.

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Topics to be Reviewed & Covered

1. Introduction & Assumptions

2. Important Terms

3. Flexible Budgets

4. Tax Accounting Compliance Issues4. Tax Accounting Compliance Issues

5. FAA Accounting Issues

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Introduction & Assumptions

• Overall Purpose of this Presentation – To introduce attendeesto the basics of financial and tax accounting and budgetingrelated to a flight department.

• Primary Assumptions:

• Part 91 corporate flight department with one aircraft• Part 91 corporate flight department with one aircraft

• Aircraft owner is a U.S. corporation conducting businessworldwide

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Important Terms

Financial Accounting – Used to produce financial statements givento investors and lenders, based on “generally acceptedaccounting principles” (i.e. GAAP).

Tax Accounting – Used to produce tax returns given to the IRS,based on the U.S. tax code.

Budget – A financial plan that is used to estimate the results ofBudget – A financial plan that is used to estimate the results offuture operations

Capital or Depreciable Asset – Tangible item that has a useful lifegreater than the current accounting period (e.g. an aircraft).

Expense – A “Gone Asset” or expired cost, short term life (e.g. fuelcost).

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Important Terms (continued)

Depreciation for Financial Accounting – Depreciation is a systemwhich aims to distribute the cost or other basic value of tangibleassets, less any salvage value over the estimated useful life ofthe asset in a systematic and rational manner.

Straight line depreciation is the most widely used method.

See example below.

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Important Terms (continued)

Depreciation for Financial Accounting example

ACQUISITION COST – EST’D SALVAGE VALUE = DEPRECIATION CHARGE

ESTIMATED USEFUL LIFE IN PERIODS FOR EACH PERIODESTIMATED USEFUL LIFE IN PERIODS FOR EACH PERIOD

» EXAMPLE:

» $2,200,000 - 200,000

» ___________________ = $200,000 per year

»

» 10 years

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Important Terms (continued)

Depreciation for Tax Accounting – Tax depreciation is theannual deduction allowed to recover the cost or otherbasis of business property with a useful life of more thenone year.

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Important Terms (continued)Tax Depreciation - Code Section 168

For Tax Return Purposes. The Modified Accelerated Cost RecoverySystem (MACRS) is mandatory for most tangible depreciable propertyplaced in Service after December 31, 1986. Property is depreciable if itwears out, has a determinable life that exceeds one year, and is used in atrade or business or for the production of income. A deduction is allowed fora reasonable allowance for the exhaustion, wear and tear of property usedin the business.in the business.

Under MACRS assets are classified according to their present class life(3,5,7,10,15,20 and 27.5 years properties).

Aircraft fall into five - year Property, the definition is property with a class lifeof more than 4 years and less than 10.

Aircraft that are used for commercial purposes are depreciated over 7years, Non-Commercial aircraft are depreciated over a 5 year period

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IMPORTANT TERMS (CONTINUED)

IRS Depreciation Percentage Rates

Year 5 Yr Life 7 Yr Life

1 20.00% 14.29%

2 32.00% 24.49%

3 19.20% 17.49%

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3 19.20% 17.49%

4 11.52% 12.49%

5 11.52% 8.93%

6 5.76% 8.92%

7 8.93%

8 4.46%

Important Terms (continued)

Direct Operating Costs (DOCs) – Costs that vary directly with theamount of activity. (e.g. fuel cost varies directly with the number offlight hours)

Fixed Operating Costs – Costs that do not vary directly with theamount of activity. (e.g. insurance cost is “fixed” and does not varydirectly with the number of flight hours)

Chart of Accounts – A list of accounts used to categorize allexpenditures for accounting purposes.

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Flexible Budget

A Flexible Budget is a type of budget that is easily revised to reflectchanges in activity levels.

For example, a flexible budget can be easily adjusted to reflect achange in estimated flight hours from 300 to 450 hours per year.

A Flexible Budget for an aircraft is setup to allow the DirectOperating Costs to be easily adjusted as the number of estimatedOperating Costs to be easily adjusted as the number of estimatedflight hours changes.

For example, the DOCs are budgeted to be $3,000 per flight hourso as the number of flight hours changes, the DOC budget changes.

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Flexible Budget Sample Format

Direct Operating Cost Budget Example

Assumed Flight Hours per Year 360

Direct Operating Costs (DOCs) Cost/Flt Hr Jan-12 Feb-12 Mar-12

Aircraft Fuel and Oil 2,000 60,000 60,000 60,000

Airframe and APU reserve 150 4,500 4,500 4,500

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Communications 50 1,500 1,500 1,500

Scheduled Maint and Repairs 200 6,000 6,000 6,000

Engine Program 300 9,000 9,000 9,000

Flight Crew Expenses 200 6,000 6,000 6,000

Flight Crew Meals 50 1,500 1,500 1,500

International Handling 350 10,500 10,500 10,500

Miscellaneous 150 4,500 4,500 4,500

Total DOCs 3,450 103,500 103,500 103,500

Flexible Budget Sample Format

Fixed Operating Cost Example

Fixed Operating Costs Jan-12 Feb-12 Mar-12

Aircraft Insurance 60,000 0 0

Property Taxes 0 0 35,000

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Contract Labor 4,000 4,000 4,000

Salaries - Maint/Pilots/Flt Att 36,000 36,000 36,000

Benefits - Salaried Employees 10,080 10,080 10,080

Hangar & Crew Office 5,000 0 0

Flight Crew Training 0 0 18,000

Miscellaneous 2,000 2,000 2,000

TOTAL Fixed Expenses 532,989 466,020 519,049

Tax Accounting Compliance Issues -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 aresubject to “exhaustion, wear and tear, and obsolescence”over time (IRC §167)over time (IRC §167)

• Depreciation deductions reduce the tax basis on a dollar fordollar basis until the basis has been reduced to zero

• Depreciation deductions are only allowed on the business use ofan aircraft

– Transporting taxpayer’s own personnel and property

– Leasing without crew

– Commercial or contract carrying of passengers or freight

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Tax Accounting Compliance Issues –Personal Use/SIFL

Determine Personal Use Benefit Value = to charter rate or safeharbor rule (SIFL)

DOT per mile rates (statute miles) and terminal chargepublished semi-annually

Need to know aircraft weight and passengers status inNeed to know aircraft weight and passengers status incompany, Control or Non-control employee

Passenger needs to have connection with company, receivesW-2 or 1099 to include the value of the flight as income.Guest’s value charged to employee passenger

Income taxes including FICA taxes are paid on the value of thetrip, NO CASH REIMBURSEMENT

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Tax Accounting Compliance Issues –Entertainment Use

Business income tax deductions are reduced (disallowed)when an airplane is used for personal entertainmentpurposes I.R.C. 274(e)(2)

All expenses of operating the aircraft including fixed andvariable expenses are subject to disallowance includingvariable expenses are subject to disallowance includingsalaries, fuel, maintenance, hangar, trip expenses,insurance, depreciation, lease payments, etc and interest ifdebt is secured by the aircraft

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FAA/FET Accounting ComplianceIssues – Charging for Personal Use

FAA – limited allowed personal use charging options –timeshare agreement (lease) & Nichols Opinion

Timeshare Agreement – allowed charges listed in FAR501.91(d). Basically can charge for twice the cost of fuel,catering, crew T&E and airplane trip expensescatering, crew T&E and airplane trip expenses

Nichols Opinion – update to the Schwab Opinion, canreimburse for certain entertainment trips. Company Boardneeds to be able to “cancel the trip” in order to reimbursealso needs to have a list of approved staff. Can reimbursefor vacation flights but not for medical trips, funerals,weddings, etc.

FET taxes to be paid where have CASH reimbursement

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Question & Answer Session

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