tax benefits of aircraft ownership aopa aviation summit 2010 a presentation designed for aircraft...
TRANSCRIPT
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Tax Benefits of Aircraft Ownership
AOPA Aviation Summit 2010
A Presentation Designed for Aircraft Owners and Operators
____________________________________
Louis M. Meiners, Jr., CPAAviation Tax Consultant
Advocate Consulting Legal Group, PLLC
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IRS Required Disclaimer
Important Disclaimer pursuant to IRS Circular 230
Note: This memorandum and supplementary information represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation.
Disclaimer: Any tax advice contained in this correspondence was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
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If you use your aircraft for business – you are entitled to tax deductions related to its use
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How effective the deductions are in generating actual tax savings depends on the nature of use, the structure of ownership and operations, and proper use of tax elections
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A Business Perspective
You are not in the 100% income tax bracket – each dollar you spend saves $.40 – the airplane must help you make money – not just generate tax savings
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An Entrepreneurial CompanyAn idea
A marketing plan
Need for cash
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Tax Savings as a Source of Capital How tax savings helped our
company grow from a Cessna 182 to an Embraer Phenom 100 in 17 short years
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Our Practice
The private fleet program serves tax and regulatory needs of businesses transporting persons or property in interstate commerce
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Indianapolis + 100 Miles Service Area Serviced by Automobile Limited success in Indianapolis
proper But engaged large grocer in
Cincinnati – who introduced us to a large baker
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Client Needs
The grocer had on site visit needs in Louisville, Nashville, Dallas, and Hutchinson, Kansas
Too far to drive – no commercial service
Enter the C182
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Employee Growth
The baker secured for us a speaking invitation at a bakery convention
Soon bakeries in Columbus, OH, Youngstown, OH, Erie, PA dropping off staff with employee shuttle
Enter the Cherokee 6
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Geographical Growth
Work with truck rental companies in Reading, PA and Miami, FL and aircraft manufacturers in Kansas, Texas and Georgia leads to work throughout the country
Discover ice then Seneca & MU2
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Work expands in California, Canada, and South America
Welcome Phenom 100
Leverage Efficiency
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Business Opportunity Comes First
But tax depreciation creates cash flow necessary to acquire an aircraft
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General Rule 50% Business Use – 5 Year MACRS
Mid-Year Mid-Quarter 20% 5% 32% 38% 19% 23% 12% 19% 12% 11% 5% 9%
With a 40 year economic life
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For 2010 and 2011 – Enhanced Expensing
Available for new or used aircraft Expense maximum $500,000 Available to small taxpayers –
maximum investment $2,500,000 Limited to taxable income
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Bonus Depreciation for 2010 50% of cost of new aircraft, or
new improvements to used aircraft
Unlimited in amount – may create loss subject to carryback
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MACRS Tax Savings Cash Flow on $1,000,000 Aircraft
Cumulative Tax Savings After Tax Net
Deduction @40% Payments Investment
1 $200,000 $ 80,000 $172,000 $92,000
2 $320,000 $128,000 $ 53,000 $17,000
3 $190,000 $ 76,000 $ 54,000 <$ 5,000>
4 $120,000 $ 48,000 $ 54,000 $ 1,000
5 $120,000 $ 48,000 $ 55,000 $ 8,000
6 $ 50,000 $ 20,000 $ 56,000 $44,000
July 1st, 15% down, 6 % int., 20 yr am
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Bonus and Enhanced Expensing
Tax Savings Cash FlowCumulative Tax Savings After Tax Net
Deduction @40% Payments Investment1 $800,000 $320,000 $172,000 <$148,000>2 $ 80,000 $ 32,000 $ 53,000 <$127,000>3 $ 48,000 $ 19,000 $ 54,000 <$ 92,000>4 $ 30,000 $ 12,000 $ 54,000 <$ 50,000>5 $ 30,000 $ 12,000 $ 55,000 <$ 7,000>6 $ 12,000 $ 5,000 $ 56,000 $ 44,000
July 1st, 15% down, 6 % int., 20 yr am
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It’s a Partnership With the U.S. Treasury
The airplane helps you increase gross income
The IRC allows deductions Everyone wins
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The FARs Do Not Prohibit Incidental Business Use
It’s transportation for hire that is limited – not use of the aircraft furthering business - or dry leasing
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The IRC Does Not Limit Deductions for Business Use of the Aircraft
But it must be ordinary, necessary, and reasonable in amount and used in a trade or business
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The Principal Tax Benefits Include Accelerated depreciation over
economic depreciation Tax deductible training Tax favored compensation for
personal non-entertainment use Deduction of fixed cost No imputed income for loving your job
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Training is Deductible Provided it Doesn’t Prepare You for New Business Commercial or ATP licenses not deductible
but private instrument, multi-engine are, as well as proficiency flying
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The Fringe Benefit of Aircraft Use
SIFL – a formula method derived from commercial rates adjusted for aircraft size
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How SIFL Works
A charge designed to tax the benefit of aircraft usage based on the cost of commercial travel. Varies based on:
Classification of employee Gross take-off weight of aircraft Length of trip Number of landings
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A SIFL EstimateAn Estimated Charge Based on an
Average 1 ½ Leg
Per M. Per Hour
< 6,000 lbs. Meridian $.1250 $ 25
6-10,000 lbs. TBM 700 $.2500 $ 60
10-25,000 lbs. CJ1 $.6000 $200
>25,000 lbs. G550 $.8000 $425
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Personal Entertainment Use May Limit Deductions
What is entertainment? Impact of payments Planning is essential Reliance on proposed regulations
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Fixed Cost Allocation When Personal Entertainment Use
Proposed regulations provide opportunities to avoid proportionate disallowance
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Structure Matters
Most aircraft held in special purpose entities Business reasons, ownership, confidentiality,
disposition Liability protection Ease of FAA compliance Sales tax deferral Income tax benefits – an entity has no
personal use
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Income Tax Structuring Pitfalls
Hobby loss classification Passive activity limitations
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Hobby Loss Classification
For fun or profit? An “honest expectation of
economic profit from an activity”
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What is an Activity?
Includes interdependent undertakings if elected by the taxpayer; but no guidance provided on how to elect to group or separate
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An Airplane is Generally a Tool, not a Profit Center
Will Generally want to group
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Passive Activity Classification Isolates Deductions to Offset Passive Income Must materially participate and
not be a rental activity
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Passive Activity Grouping Guidance by Rev Proc 2010-13 Effective for years beginning after
1/25/10 statement in original return of entities to be grouped as a single activity
No election is an election to separate
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Can Trade Business Airplanes Tax Free, but not Business for Personal Like-kind exchange rules apply for
federal income tax purposes and in many state for sales tax purposes
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Can Convert LLC Airplane to Personal Tax Free After Fully Depreciated
But during depreciable life business percentages must exceed 50%
Eventual sale will result in ordinary income even after personal conversion
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Recordkeeping is Vital
Why you expected economic profit Your investment of time Account for the business purpose of
each flight hour
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State Tax Planning
States with property tax Assessment date presence or, more
than 50% of time Or declared home base
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Sales and Use Tax Planning Where you buy, or Where you are based; But not generally where formed; But may be where you fly
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Where You buy
Unless exempt – its taxable Popular exemptions – fly away,
casual sale, sale for resale May require exemption certificate
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Where You Are Based
If it would be subject to sales tax if purchased; subject to use tax if based
Popular exemptions, casual sale, sale for resale
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Where You Fly
If you visit often, you may get trapped Generally, but not always, credit for
tax at home Often extortion tactics – lien now,
argue later Suppress your N number – level the
playing field
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Advocate Consulting Legal Group, PLLC
A Florida Law Firm which limits its practice to serving aircraft owners and operators
Contact - Lou Meiners, Jr., CPA orScott Battle, Business Development
Aviation Tax Consultant888-325-1942
[email protected]@advocatetax.com
For more tax information visitwww.advocatetax.com
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IRS Required Disclaimer
Important Disclaimer pursuant to IRS Circular 230
Note: This memorandum and supplementary information represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation.
Disclaimer: Any tax advice contained in this correspondence was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.