Calculating Operating Costs

QUOTE=vintage cessna;1202067]Sure.

Owner has income taxed at the top Federal rate and lives in a state with an income tax.
Click to expand...

So rental income will be taxed at ~45%, operating expenses and depreciation will be claimed at same rates using MACRS schedule?

New plane acquisition costs are less than 150 K.
Click to expand...

Say $135k?

Owner pays cash.
Click to expand...

Roger that. No debt service included in schedule

Airplane is located in an area with high per capita income.
Click to expand...

So rental rate and usage are both higher than normal? Can you provide rough estimates of monthly hours and rents?

Will rental revenues be split with school, FBO or other?

Will owner be responsible for typical own/op expenses consistent with normal leaseback structure?

From his share of rental, will owner be expected to pay

Fuel?

Maintenance?

Storage?

Insurance?

Property taxes?

Data bases & subscriptions?

Other costs?

Can you help with these cost estimates?
 
What kind of aircraft should I look at buying as a first time buyer then? I want something I can upgrade as I go; something that's either IFR rated or something that can get IFR rated; something that's not complex or HP; something that's relatively cost effective to maintain, etc.? Again, I like the Cherokee 140/180's or the Warriors. You can get those for pretty cheap and in decent condition and I can upgrade as I need to.
 
If you like them and they fit your parameters, I'd think that would be a logical place to start. Several owners post here regularly, and seem to like them.

LevelWing said:
What kind of aircraft should I look at buying as a first time buyer then? I want something I can upgrade as I go; something that's either IFR rated or something that can get IFR rated; something that's not complex or HP; something that's relatively cost effective to maintain, etc.? Again, I like the Cherokee 140/180's or the Warriors. You can get those for pretty cheap and in decent condition and I can upgrade as I need to.
Click to expand...
 
wabower said:
QUOTE=vintage cessna;1202067]Sure.



So rental income will be taxed at ~45%, operating expenses and depreciation will be claimed at same rates using MACRS schedule?



Say $135k?



Roger that. No debt service included in schedule



So rental rate and usage are both higher than normal? Can you provide rough estimates of monthly hours and rents?

Will rental revenues be split with school, FBO or other?

Will owner be responsible for typical own/op expenses consistent with normal leaseback structure?

From his share of rental, will owner be expected to pay

Fuel?

Maintenance?

Storage?

Insurance?

Property taxes?

Data bases & subscriptions?

Other costs?

Can you help with these cost estimates?
Click to expand...

You don't use the normal depreciation schedule, you take a section 179 expense and essentially depreciate the aircraft to 0 the first year.

Standard 80/20 split with the FBO, owner pays all expenses.

Fuel- $12 to 24 per Hobbs hour , depending if it is Mogas or 100 ll
Insurance- 3 to 5K depending of the FBO
Maintenance - $15 per Hobbs hour
Tie down- around $100 month, forget hangar in the high rent districts.
Property taxes- 0, in many locations
Data base update- $55 per year , Nav only update.
LLC fee- $50 per year

I'm only talking about LSA. They are economical on the fuel, and dirt simple. In the right market, people are willing to pay more to rent a new glass equipped LSA than they are an old C150 . The aircraft needs to rent at a minimum of 500 hours per year. The rent needs to be somewhere between $ 110-130, but appear to be relatively inexpensive compared to other rental options. The owner needs to be active in the management of the aircraft. The aircraft has to be well liked by the Flight Instructors.

In the right circumstances and location it could work out, in other places it could be a disaster.
 
Tony_Scarpelli said:
Something tells me you are new to aviation and have no real clue as to where to find accurate stats on engine failures, maintenance and events required to do this.

Math is the easy part sport.


Avoiding "garbage in garbage out" is the problem.

I am sure you could come with some pretty spread sheet, I just do not think it will have any relationship to reality. and none of your posts have shown that you have any particular expertise in this area (aviation).
Click to expand...

Yep, don't know much about aviation, stats, or business. Not a genius like you. Just recently celebrated the 30th anniversary of my private certificate and, coincidentally, the 30th anniversary of my first college level stats class.

Nowhere near as well versed, educated, or experienced as you, champ.
 
So tax basis is zero after first year and sale of plane is taxable at highest rate upon sale, as are all revenues after the first year? What's your estimate of residual value after 5 years?

What's TBO on LSA engines? Assume new engine or major O/H every three years? 500 hr/yr is fairly high use and generates significant wear and tear on planes I've watched. Will interior refurb be required during initial 5-year period? and/or paint?

vintage cessna said:
You don't use the normal depreciation schedule, you take a section 179 expense and essentially depreciate the aircraft to 0 the first year.

Standard 80/20 split with the FBO, owner pays all expenses.

Fuel- $12 to 24 per Hobbs hour , depending if it is Mogas or 100 ll
Insurance- 3 to 5K depending of the FBO
Maintenance - $15 per Hobbs hour
Tie down- around $100 month, forget hangar in the high rent districts.
Property taxes- 0, in many locations
Data base update- $55 per year , Nav only update.
LLC fee- $50 per year

I'm only talking about LSA. They are economical on the fuel, and dirt simple. In the right market, people are willing to pay more to rent a new glass equipped LSA than they are an old C150 . The aircraft needs to rent at a minimum of 500 hours per year. The rent needs to be somewhere between $ 110-130, but appear to be relatively inexpensive compared to other rental options. The owner needs to be active in the management of the aircraft. The aircraft has to be well liked by the Flight Instructors.

In the right circumstances and location it could work out, in other places it could be a disaster.
Click to expand...
 
wabower said:
So tax basis is zero after first year and sale of plane is taxable at highest rate upon sale, as are all revenues after the first year? What's your estimate of residual value after 5 years?

What's TBO on LSA engines? Assume new engine or major O/H every three years? 500 hr/yr is fairly high use and generates significant wear and tear on planes I've watched. Will interior refurb be required during initial 5-year period? and/or paint?
Click to expand...

If your point is, from a strictly business point of view , a lease back is a no go , I would agree.

Wether a lease back is a " success or not, depends on your goals. For the OP, since he has to borrow money to buy the plane, I would definitely advise against it.

I have an LSA on leaseback. As for resale value in five years, I don't care what it is. When I'm too decrepit to fly it myself, I'll give it to my son. TBO is 2000 ( TACH) hours, which equate to about 2500 HOBBS, about 15 k (last I checked) for overhaul.

I have found that if you wash an airplane every couple of months and wax it twice a year, it stays looking good for a long time. I own a Skycatcher, so there isn't a whole heck of a lot that needs to be refurbished as far as the interior goes.

As for how to depreciate that just depends. I depreciated the entire purchase in one year only because it made sense for my circumstances.

When I said the owner needs to be active in the management of the aircraft , that goes beyond what some people might think. All the people who are going to rent your airplane need to meet the owner and talk a little bit, it makes a difference in their attitude towards the plane.

Getting back to the OP, I wouldn't buy an airplane for personal or lease back purposes if I had to borrow money to do it.
 
I'll run your assumptions through the model I designed many years ago just to see how it looks. And BTW I think your active participation is key from a tax standpoint as well, since you can then characterize the airplane loss as trade or business instead of investment or portfolio if you were a passive owner.

vintage cessna said:
If your point is, from a strictly business point of view , a lease back is a no go , I would agree.

Wether a lease back is a " success or not, depends on your goals. For the OP, since he has to borrow money to buy the plane, I would definitely advise against it.

I have an LSA on leaseback. As for resale value in five years, I don't care what it is. When I'm too decrepit to fly it myself, I'll give it to my son. TBO is 2000 ( TACH) hours, which equate to about 2500 HOBBS, about 15 k (last I checked) for overhaul.

I have found that if you wash an airplane every couple of months and wax it twice a year, it stays looking good for a long time. I own a Skycatcher, so there isn't a whole heck of a lot that needs to be refurbished as far as the interior goes.

As for how to depreciate that just depends. I depreciated the entire purchase in one year only because it made sense for my circumstances.

When I said the owner needs to be active in the management of the aircraft , that goes beyond what some people might think. All the people who are going to rent your airplane need to meet the owner and talk a little bit, it makes a difference in their attitude towards the plane.

Getting back to the OP, I wouldn't buy an airplane for personal or lease back purposes if I had to borrow money to do it.
Click to expand...
 
You made a good point about any earnings being taxed also at a high rate. When typing my response I guess a kept imposing my own circumstances in the response.

The year I placed the aircraft in the business, my income was maxing out, but the next year and subsequent years I knew my income was going to be substantially lower, so any earnings would be taxed at a much lower rate.

A lot of factors just came together at the right time for me, and it wasn't a hard decision.

So when someone asks " should I consider a lease back" , it would really require an in depth interview to give a good answer.
 
I think you're absolutely right. And FWIW, situations like yours are common-place when high-income individuals are searching for accelerated write-offs or Sec. 179 opportunities to match-up against high-income years. It can be a great solution when it works, but airplane deals (and all other equipment deals as well) are a bit tricky because the income from operations or sale of the depreciated or expensed asset is all ordinary income that by itself can elevate the owner's tax bracket in the year of sale. Big market swings like the '08 crash can also scuttle these deals with catastrophic consequences, especially if debt is used to fund the purchase.

My analysis (that triggered the questions posed to you) evolved because I needed a simple one-page tool that incorporated a consistent method of quantifying the results of any set of assumptions on a full-cycle after-tax basis without preferential bias. Nobody else had one, and the airplane companies used their canned best-case projections that conveniently (for them) omitted or softened by footnote-only disclosure some of the potential buyer's most important financial pitfalls.

From a financial standpoint, however, the IRS implications are often secondary to the baffling maze of state and local taxes that differ dramatically by state and change frequently. For example, my first airplane purchase tax deal for a client was while working at Ernst CPA firm in the early 60's, and was largely driven by the investment tax credit provisions that have long-since been stricken from the code and involved state line issues and strategies that are common for places like Kansas City. But for a lifer in the financial/tax game it has been interesting to watch all the strategies and changes evolve over 50+ years.

vintage cessna said:
You made a good point about any earnings being taxed also at a high rate. When typing my response I guess a kept imposing my own circumstances in the response.

The year I placed the aircraft in the business, my income was maxing out, but the next year and subsequent years I knew my income was going to be substantially lower, so any earnings would be taxed at a much lower rate.

A lot of factors just came together at the right time for me, and it wasn't a hard decision.

So when someone asks " should I consider a lease back" , it would really require an in depth interview to give a good answer.
Click to expand...
 
I appreciate the advice everyone has given in this thread. If a leaseback isn't going to be cheaper in the long run then buying my own plane and using that for everything will be. At the very least I won't be paying almost $200/hour for plane plus instructor. I'm looking at the Cherkoees/Warriors as well as the Beechcraft Musketeers, Sundowners and Sports. If the Beechcrafts fly anything like the Sierras, then I'm likely not interested. However, given that I'll be purchasing this on my own, I am on a smaller budget than a leaseback would have been.
 
LevelWing said:
I appreciate the advice everyone has given in this thread. If a leaseback isn't going to be cheaper in the long run then buying my own plane and using that for everything will be. At the very least I won't be paying almost $200/hour for plane plus instructor. I'm looking at the Cherkoees/Warriors as well as the Beechcraft Musketeers, Sundowners and Sports. If the Beechcrafts fly anything like the Sierras, then I'm likely not interested. However, given that I'll be purchasing this on my own, I am on a smaller budget than a leaseback would have been.
Click to expand...

This will depend a LOT on the condition of the airplane and even more so on the condition of the engine.

Secondarily on how much you fly it a year.
 
Has anyone suggested, or have you thought of finding a few partners and starting your own club? Get about 3 or 4 partners and the Hangar rent, insurance, annuals and maintenance and loan payment are suddenly about 20% of buying it yourself.
 
JOhnH said:
Has anyone suggested, or have you thought of finding a few partners and starting your own club? Get about 3 or 4 partners and the Hangar rent, insurance, annuals and maintenance and loan payment are suddenly about 20% of buying it yourself.
Click to expand...
Unfortunately that's not an option right now, or I would definitely jump on that.

How much extra maintenance is required on a HP/complex? With a complex you have the retractable gear so I'm sure that adds a lot. Insurance is likely going to go up as well. I've found a couple of Mooney's that could work but I don't know enough about them to know if that's a viable option.
 
You must log in or register to reply here.
Back
Top