Fearless Tower
Touchdown! Greaser!
Not looking for specific internet accountant advice, but doing some preliminary purchase research and am curious if there are any tax advantages to purchasing an airplane and doing a leaseback with a flying club.
Any Tax Advantages to a Leaseback?
- Thread starter Fearless Tower
- Start date
Areeda
Pattern Altitude
Yes there are.
As a leaseback the operation is a business so you can file a Schedule C or better yet have an LLC and get the profit (ha) and loss statement.
You can depreciate the asset and maintenance can be deducted as an expense.
My opinion carries no weight with the IRS or any State or local tax authority. It's probably not worth what you paid for it.
Joe
As a leaseback the operation is a business so you can file a Schedule C or better yet have an LLC and get the profit (ha) and loss statement.
You can depreciate the asset and maintenance can be deducted as an expense.
My opinion carries no weight with the IRS or any State or local tax authority. It's probably not worth what you paid for it.
Joe
...until the day the IRS looks at it and decides that your 'business' is not quite that and subject to the passive loss rules.
To the OP:
There are a couple of people on this and other aviation forums who have an 'auto-search' running that alerts them the moment the words 'leaseback' appear in a post. They will be around promptly to provide you with 'advice' on the issue.
poadeleted20
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Yes, it is possible to obtain tax advantages from a leaseback. Whether you can achieve those advantages is entirely another story which only your tax professional can tell you. As for the rest, from the inimitable Jason Hegel, by permission...
Captain Jason’s Leaseback Advice:
1. Leasebacks are a business, always treat them like one. Never get emotionally attached to a leaseback airplane, it will get abused just like a rental car does, and you don't go seeking those out when you buy a used car, do you? Put leaseback aircraft in corporations, run their books separately, have a separate tax return for the aircraft each year, etc. Talk to your CPA and lawyer, make sure you understand both the legal and tax issues.
2. You can make a lot of money with a leaseback. You can lose a lot of money with a leaseback. Many of the factors of making/losing money are completely outside of your control. If your goal in a leaseback is to have someone else pay for your personal airplane, you probably are not going to be happy with the result. If your goal is to defer the cost of your own flying, get your ratings, and perhaps make some money on the side, you can do well if you pick the right FBO/flight school to do business with.
3. If you leaseback an aircraft to an honest FBO, you have a chance to do well. If you leaseback an aircraft to a crook, you have no chance at all. Get to know with whom you are doing business. Ask around the airport, talk to the other owners, etc. Be careful of any FBO that pushes you to get into this too quickly. The best will be honest and upfront about the risks and will caution you to avoid it if you have doubts. Talk to other owners at the FBO, find out how they have been treated.
4. You must run the numbers from a realistic viewpoint, remember this is a business. Take what you're paid each hour by the FBO and subtract the per hour costs such as fuel and maintenance reserves (if you don’t, that $15,000 engine is going to surprise you). That figure is your actual hourly income (the rest does not exist for this calculation) Take the monthly fixed costs and divide them by that "true" per hour income. That is the number of hours the aircraft must fly each month to break even. The monthly fixed costs must include insurance, tie-down, and the "payment", even if there is no payment on the aircraft. The cash you might pay for an aircraft has value, if you don't include it in the monthly fixed costs, you're letting the FBO use your money for free. So add in what the payment would be if you had one.
5. You're still a renter, you just rent one specific aircraft for a reduced rate, but you're still a renter and must schedule your flights along with everyone else. Do you have the right to bump paying customers? If so, how much notice must you give? If you are inclined to "bump" paying customers for your own flying very often, you're probably a poor leaseback candidate. You'll upset those customers and you'll be hurting your own income stream. Find out about renting other airplanes at the FBO for a discounted rate if your plane is down, or otherwise busy. Everything in a leaseback is negotiable, so ask!
6. The standard leaseback agreement is the basic 80/20 plan. You get 80% of the per hour rental rate, the FBO gets 20%. Out of your 80% you pay fuel, insurance, tie-down, maintenance, and the "payment" for the aircraft (again, this has nothing to do with actually having a bank loan or not, it is the monthly value of the money invested into the airplane). Some FBOs do leasebacks differently, and if you run across one of them, be really sure of what they are offering before you sign on the dotted line.
7. FBOs like leasebacks because it removes all the risk from them. They get 20% of the rental rate, yet do not have to own or maintain a fleet of airplanes (and sometimes they make money off the maintenance). You absorb all that risk. In exchange for that risk, you have the chance to make some money, and you'll be able to fly for about half the price of renting (or less).
8. The best leaseback deals are on aircraft that fly a lot of hours each month. A Cessna 172 that flies 80 hours a month will almost always make money. A Piper Arrow that flies 20 hours a month will almost always lose money. The breakeven point on most single engine airplanes is around 50 hours and the leaseback becomes really worth doing from a profit perspective at 65 hours. I know of a case where a Piper Arrow was leased to a flight school and it flew 60 hours over 8 months. The owner lost a lot of money in insurance and maintenance. I also know of a case where a Cessna 172 was leased to a flight school and it flew an average of 87.2 hours a month over a 12-month period, the owner made a fair amount of money that year.
9. Don’t put a brand new airplane on leaseback, they lose too much value the first few years and are very quickly not new anymore when on a rental line. An example is the 1999 172SP I bought. I paid $124,000 for it with a fresh engine installed. It would cost about $209,000 to buy that plane new, in its current configuration (in 2004). Since even a new plane looks used very quickly on a rental line, I saved $80,000 (or about 1/3 the price) in exchange for having 2,200 hours already on the airframe. Those hours do not affect the rental rate. There is one exception to this rule however, and that is the new 50% bonus tax deduction signed into law by President Bush. If you have a need for a $150,000 tax deduction this year, buying a brand new 172SP for $209,000 does make sense, because of the unusual tax benefits offered by the new law.
10. Only do a leaseback if you can afford to own the airplane without the leaseback. Used aircraft can be expensive the first few months you own them. Don't expect to take anything home the first six months. People who already have money seem to do well with leasebacks. Those who really cannot afford an airplane in the first place seem to do poorly. These are generalizations of course, but there is an old saw that says it takes money to make money.
11. Buy the right aircraft, the right way. You can do everything else right, but if you buy the wrong aircraft or pay too much, you'll lose every time. This doesn't mean pick a Cessna 172 over a Piper Warrior, this means pick the right Cessna 172 or Piper Warrior. Some airplanes just shouldn't be leased back. A Mooney or Bonanza are good examples. Very old airplanes often make poor leasebacks as well. The only airplane older than about 25 years I'd leaseback would be a Cessna 150. You want something reliable with a known history. Avoid the very high time and very low time airplanes. Avoid an airplane that hasn’t flown much recently. An airplane that has had 500 hours put on it in the past 10 years will have a lot of things break when the flight school puts 500 hours on it in 6 months. I’ve seen this happen to others and it happened to me with my 172N.
12. You must sometimes spend money to make money. People want to rent airplanes with nice interiors and good panels. If the per hour rental rate is equal, would you rather fly in a Cessna 172 with ARC radios and no GPS, or a full Garmin panel? The new panel and a new interior might add 20% to the price of the airplane but double your monthly profit.
13. Look over the past two years records of similar airplanes at the FBO you’re looking at doing business with. Not just the total hours flown, but how much has been spent on maintenance and how much total income there was after all costs. There is no more honest way to see what to expect than to look at the real world figures from existing aircraft on the FBOs rental line. Do not leaseback to anyone who won't show you the records on the existing airplanes and introduce you to the other aircraft owners.
14. Think long and hard about why you're doing this. Many people get into leasebacks for all the wrong reasons, make sure you're doing it for the right reasons. A leaseback can make sense for some people, it can be a disaster for others. It generally isn't a good way to go about having someone else pay for your own personal airplane, since it will wear faster and not be cared for as well as if it were your own. In addition, you're limited in what you can do with it, given that you still have to schedule it and can’t take it very far without it costing you a lot in lost income. It can however provide you with your ratings, some money, and some low cost flying if managed well.
15. To sum it up, a leaseback is often used to reduce the cost of flying, sometimes it is used to make money, sometimes it is used as a tax shelter (consult your tax advisor on this one). The months I did a lot of personal flying, I tended to break even, and have lost money a few months, but then if you consider what my flying would have cost otherwise, I came out way ahead. If you can't afford to own regardless of the leaseback income, consider that you're making a serious commitment and while it is very easy to buy a plane, it can be hard to sell one.
For the record, I had three aircraft on leaseback with two different flight schools at Addison. A 1977 Cessna 172N, a 1999 Cessna 172SP, and a 1997 Schweizer 300CB helicopter. I did well with the older 172 and the helicopter, the 172SP mostly broke even, but I did fly it about 100 hours personally without paying a dime, so it wasn’t too bad. I earned my commercial and CFI license in both airplanes and helicopters, flew almost 500 personal hours between all the aircraft, and came out $36,000 ahead at the end of the day. I sold them once I was done flight instructing, and have since bought a Piper Twin Comanche for my personal use. I considered leasing it back, but choose not to because I want it available to fly whenever I want to go, one thing that isn’t possible with a leaseback.
Captain Jason’s Leaseback Advice:
1. Leasebacks are a business, always treat them like one. Never get emotionally attached to a leaseback airplane, it will get abused just like a rental car does, and you don't go seeking those out when you buy a used car, do you? Put leaseback aircraft in corporations, run their books separately, have a separate tax return for the aircraft each year, etc. Talk to your CPA and lawyer, make sure you understand both the legal and tax issues.
2. You can make a lot of money with a leaseback. You can lose a lot of money with a leaseback. Many of the factors of making/losing money are completely outside of your control. If your goal in a leaseback is to have someone else pay for your personal airplane, you probably are not going to be happy with the result. If your goal is to defer the cost of your own flying, get your ratings, and perhaps make some money on the side, you can do well if you pick the right FBO/flight school to do business with.
3. If you leaseback an aircraft to an honest FBO, you have a chance to do well. If you leaseback an aircraft to a crook, you have no chance at all. Get to know with whom you are doing business. Ask around the airport, talk to the other owners, etc. Be careful of any FBO that pushes you to get into this too quickly. The best will be honest and upfront about the risks and will caution you to avoid it if you have doubts. Talk to other owners at the FBO, find out how they have been treated.
4. You must run the numbers from a realistic viewpoint, remember this is a business. Take what you're paid each hour by the FBO and subtract the per hour costs such as fuel and maintenance reserves (if you don’t, that $15,000 engine is going to surprise you). That figure is your actual hourly income (the rest does not exist for this calculation) Take the monthly fixed costs and divide them by that "true" per hour income. That is the number of hours the aircraft must fly each month to break even. The monthly fixed costs must include insurance, tie-down, and the "payment", even if there is no payment on the aircraft. The cash you might pay for an aircraft has value, if you don't include it in the monthly fixed costs, you're letting the FBO use your money for free. So add in what the payment would be if you had one.
5. You're still a renter, you just rent one specific aircraft for a reduced rate, but you're still a renter and must schedule your flights along with everyone else. Do you have the right to bump paying customers? If so, how much notice must you give? If you are inclined to "bump" paying customers for your own flying very often, you're probably a poor leaseback candidate. You'll upset those customers and you'll be hurting your own income stream. Find out about renting other airplanes at the FBO for a discounted rate if your plane is down, or otherwise busy. Everything in a leaseback is negotiable, so ask!
6. The standard leaseback agreement is the basic 80/20 plan. You get 80% of the per hour rental rate, the FBO gets 20%. Out of your 80% you pay fuel, insurance, tie-down, maintenance, and the "payment" for the aircraft (again, this has nothing to do with actually having a bank loan or not, it is the monthly value of the money invested into the airplane). Some FBOs do leasebacks differently, and if you run across one of them, be really sure of what they are offering before you sign on the dotted line.
7. FBOs like leasebacks because it removes all the risk from them. They get 20% of the rental rate, yet do not have to own or maintain a fleet of airplanes (and sometimes they make money off the maintenance). You absorb all that risk. In exchange for that risk, you have the chance to make some money, and you'll be able to fly for about half the price of renting (or less).
8. The best leaseback deals are on aircraft that fly a lot of hours each month. A Cessna 172 that flies 80 hours a month will almost always make money. A Piper Arrow that flies 20 hours a month will almost always lose money. The breakeven point on most single engine airplanes is around 50 hours and the leaseback becomes really worth doing from a profit perspective at 65 hours. I know of a case where a Piper Arrow was leased to a flight school and it flew 60 hours over 8 months. The owner lost a lot of money in insurance and maintenance. I also know of a case where a Cessna 172 was leased to a flight school and it flew an average of 87.2 hours a month over a 12-month period, the owner made a fair amount of money that year.
9. Don’t put a brand new airplane on leaseback, they lose too much value the first few years and are very quickly not new anymore when on a rental line. An example is the 1999 172SP I bought. I paid $124,000 for it with a fresh engine installed. It would cost about $209,000 to buy that plane new, in its current configuration (in 2004). Since even a new plane looks used very quickly on a rental line, I saved $80,000 (or about 1/3 the price) in exchange for having 2,200 hours already on the airframe. Those hours do not affect the rental rate. There is one exception to this rule however, and that is the new 50% bonus tax deduction signed into law by President Bush. If you have a need for a $150,000 tax deduction this year, buying a brand new 172SP for $209,000 does make sense, because of the unusual tax benefits offered by the new law.
10. Only do a leaseback if you can afford to own the airplane without the leaseback. Used aircraft can be expensive the first few months you own them. Don't expect to take anything home the first six months. People who already have money seem to do well with leasebacks. Those who really cannot afford an airplane in the first place seem to do poorly. These are generalizations of course, but there is an old saw that says it takes money to make money.
11. Buy the right aircraft, the right way. You can do everything else right, but if you buy the wrong aircraft or pay too much, you'll lose every time. This doesn't mean pick a Cessna 172 over a Piper Warrior, this means pick the right Cessna 172 or Piper Warrior. Some airplanes just shouldn't be leased back. A Mooney or Bonanza are good examples. Very old airplanes often make poor leasebacks as well. The only airplane older than about 25 years I'd leaseback would be a Cessna 150. You want something reliable with a known history. Avoid the very high time and very low time airplanes. Avoid an airplane that hasn’t flown much recently. An airplane that has had 500 hours put on it in the past 10 years will have a lot of things break when the flight school puts 500 hours on it in 6 months. I’ve seen this happen to others and it happened to me with my 172N.
12. You must sometimes spend money to make money. People want to rent airplanes with nice interiors and good panels. If the per hour rental rate is equal, would you rather fly in a Cessna 172 with ARC radios and no GPS, or a full Garmin panel? The new panel and a new interior might add 20% to the price of the airplane but double your monthly profit.
13. Look over the past two years records of similar airplanes at the FBO you’re looking at doing business with. Not just the total hours flown, but how much has been spent on maintenance and how much total income there was after all costs. There is no more honest way to see what to expect than to look at the real world figures from existing aircraft on the FBOs rental line. Do not leaseback to anyone who won't show you the records on the existing airplanes and introduce you to the other aircraft owners.
14. Think long and hard about why you're doing this. Many people get into leasebacks for all the wrong reasons, make sure you're doing it for the right reasons. A leaseback can make sense for some people, it can be a disaster for others. It generally isn't a good way to go about having someone else pay for your own personal airplane, since it will wear faster and not be cared for as well as if it were your own. In addition, you're limited in what you can do with it, given that you still have to schedule it and can’t take it very far without it costing you a lot in lost income. It can however provide you with your ratings, some money, and some low cost flying if managed well.
15. To sum it up, a leaseback is often used to reduce the cost of flying, sometimes it is used to make money, sometimes it is used as a tax shelter (consult your tax advisor on this one). The months I did a lot of personal flying, I tended to break even, and have lost money a few months, but then if you consider what my flying would have cost otherwise, I came out way ahead. If you can't afford to own regardless of the leaseback income, consider that you're making a serious commitment and while it is very easy to buy a plane, it can be hard to sell one.
For the record, I had three aircraft on leaseback with two different flight schools at Addison. A 1977 Cessna 172N, a 1999 Cessna 172SP, and a 1997 Schweizer 300CB helicopter. I did well with the older 172 and the helicopter, the 172SP mostly broke even, but I did fly it about 100 hours personally without paying a dime, so it wasn’t too bad. I earned my commercial and CFI license in both airplanes and helicopters, flew almost 500 personal hours between all the aircraft, and came out $36,000 ahead at the end of the day. I sold them once I was done flight instructing, and have since bought a Piper Twin Comanche for my personal use. I considered leasing it back, but choose not to because I want it available to fly whenever I want to go, one thing that isn’t possible with a leaseback.
Doggtyred
En-Route
Very good stuff...
wabower
Touchdown! Greaser!
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Wayne
It's the Sec. 183 hobby loss rules that you should worry about rather than the PAL issue. PAL's aren't lost, they are just deferred until the T/P generated PAI, presmumably when the airplane is sold.
CollinLeon
Pre-takeoff checklist
Do you like having to reserve your plane a month in advance just to take it out for a weekend trip? When I had mine on leaseback, that is what usually happened. Eventually, I got tired of the students stripping out the gears on the radios and destroying the interior, so I took it off leaseback. Looking back, I wish I hadn't had it on leaseback.
If you are an A&P / IA, then leaseback can be profitable since you are basically paying yourself for the maintenance labor on the aircraft. With an aircraft flying 100 hours per month and a shop rate of $50 per hour, assuming 20 hours to do the 100 hour inspection, you're paying yourself $1000 per month. These days I suspect that most shop rates are more than $50 per hour, so it would be even more per month.
If you are an A&P / IA, then leaseback can be profitable since you are basically paying yourself for the maintenance labor on the aircraft. With an aircraft flying 100 hours per month and a shop rate of $50 per hour, assuming 20 hours to do the 100 hour inspection, you're paying yourself $1000 per month. These days I suspect that most shop rates are more than $50 per hour, so it would be even more per month.
Fearless Tower
Touchdown! Greaser!
Reserving the plane wouldn't be too much of a problem - in this particular case I would be doing most of the flying in what I anticipate as low demand time and I would be renting the twin for the x-countries. Also, this particular club has a rather large fleet and generally you can get the plane you want scheduling within a week or two.
In this particular case, when I run the numbers and compare between owning/insuring the plane for just myself vs putting it into the club - with conservative useage estimates, it ends up being close to even. In a reasonable month, it looks like the leaseback will actually show a profit even with holding back for engine reserve. The big difference, however, is the risk:
A/C in question is a 7-ECA (why I was asking about the rear stick removal in another thread). There is a definite demand for it, but obviously once someone ground-loops it or stomps on the brakes and noses it over, the numbers change in a rather negative direction.
CollinLeon
Pre-takeoff checklist
Maybe with a club it would be different... With my leaseback to a flight school, it wasn't something that I would want to repeat... It probably earned enough money for the engine overhaul, but it's not what I would consider as exactly a money making endeavor. Combining that with not being able to fly my plane when I want and it's not something I would do again.
It did not give me any tax advantages since I am an independent consultant and as such, I could write off the cost of the aircraft for business use anyway. In fact, I've had out of town contracts where it was definitely quicker to get there via my plane than via an airliner. I never seem to get contracts in cities where there are hub airports. I get ones in places where you spend 8-10 hours getting there even with the airlines...