Top Aviation Tax Myths Debunked
Myths abound around the topic of taxes on private aviation, and for good reason. Aviation taxes come with their own set of seemingly complicated regulations. Aircraft owners often harbor misconceptions and gain faulty information about even the most basic aviation tax questions, such as:
- What can I write off?
- How does the IRS view the purchase of an aircraft?
- And, who do I work with to create the best ownership structure?
But with a little knowledge and the help of a trusted advisor, navigating aircraft taxes doesn’t have to be so difficult.
To help you gain the best tax benefits from your aircraft, we’re debunking the top eight aviation tax myths.
Aviation Tax Myth #1: Your regular CPA or lawyer is the best person to help you navigate aviation tax issues and define your ownership structure.
The truth is, most CPAs and lawyers lack experience with the various compliance, sales and use, and IRS issues that come with aircraft ownership. FAA regulations are typically foreign territory. Tax considerations play a large role in determining your ownership structure. Don’t leave it to chance, hire a tax advisor with a background in aviation to guide you through the process. Their knowledge and experience plays a key role in getting the greatest and most efficient tax benefit from your aircraft.
Aviation Tax Myth #2: An aircraft makes sense for anyone looking to lower a significant tax bill.
The purchase of a business aircraft serves as an effective tool to get a big depreciation and deduction on your tax bill. But it’s not the right move for everyone. Having a business use case for your aircraft is paramount to gaining the tax efficiencies offered by aircraft ownership.
You may need to think outside the box – for example, if you have clients or offices in several locations, an aircraft can help you increase face-to-face visits while saving you time. On the other hand, if you have one office location and your clients are within a short drive, an aircraft may not be the best tool for growing your business. Understand your mission profile before purchasing an aircraft and talk with a trusted sales advisor and aviation tax consultant to ensure you are making the best choices to achieve your business and tax goals.
Aviation Tax Myth #3: Bonus depreciation is the only tax break offered on private aircraft.
For businesses with adequate income and a real business travel need, there are several private aviation tax benefits. The three main tax benefits you can take advantage of, including bonus depreciation, are:
- MACRS depreciation: There are two methods of MACRS depreciation. The first is straight-line depreciation, which allows you to write off the complete cost of your aircraft over five years at 20 percent per year. The second option is modified depreciation, which allows you to write off the full balance, but with an increased amount over the first two years..
- Bonus depreciation: With bonus depreciation, you can gain immediate tax relief. It allows for a 100 percent write-off on a new or used airplane in the first year.
- Section 179 expensing: If you purchase a new or used airplane for under $2.5 million (phase-out), this benefit allows you to write off up to $1,000,000 in the first year. Section 179 expensing can also be combined with MACRS depreciation if needed.
Aviation Tax Myth #4: You must use your aircraft for business at least 50 percent of the time to capture tax savings.
While your aircraft must be used for business at least 50 percent of the time to take advantage of bonus depreciation, it’s important to remember that bonus depreciation is not the only tax savings associated with your aircraft. If you only use the aircraft for business 25 percent of the time, you can still write 25 percent off as a business expense. With an aircraft that costs millions, you’re looking at a sizable write-off.
“There is nothing wrong with writing off 15 to 20 percent of your aircraft,” says Daniel Cheung of Aviation Tax Consultants. “You’ll see immediate tax benefits as well as depreciation benefits on a straight-line basis.”
Aviation Tax Myth #5: You can write off 100 percent of your aircraft as a business expense.
Speaking of business versus personal use. Many buyers are under the false impression that with some creativity, they can write off 100 percent of their aircraft as a business expense.
This is very rarely the case. For most aircraft owners, personal use of the aircraft is a reality. Unless you purchase your aircraft at the end of the year, and can fly only for business given the short period of time for which you have owned the aircraft, you’ll likely report some percentage of personal use.
Aviation Tax Myth #6: You pay back your deductions when you sell your aircraft.
It’s true, the depreciation of your aircraft is recaptured at the time of sale through gains taxes. Aviation Tax Consultants describes this taxable gain as “the amount that the sale price exceeds the adjusted basis of the aircraft.”
However, the economic depreciation of the plane and the previously deducted operating expenses are never recaptured.
Aviation Tax Myth #7: Writing off an aircraft is a huge red flag and will result in an IRS audit
It is generally true that the purchase of a business aircraft can increase your IRS audit risk profile, however, an IRS examination of your personal or business income tax return is still a relatively rare occurrence.
Many factors are considered by the IRS and no one is certain what the selection formula is. Based on our experience in the past 15 years, we do know that certain ownership structures and filing positions do indeed trigger a higher rate of audit. One of the primary goals of ATC’s planning is to avoid these undesirable scenarios for our clients and support them throughout the process.
Each aircraft-owner’s tax situation is unique. It’s important to work with a certified professional and understand how an aircraft can best help you achieve your tax and business goals. Looking for a recommendation on a tax consultant? Contact us at 866-359-5222. We will help determine your needs and recommend the best tax consultant for your situation.
*Bonus depreciation percentages subject to change. KCAC Aviation is not a tax consultant.