Creative Tax Strategies for Buying a Plane

[Unregistered]

For various reasons, 2013 has been a good year, one of the companies I have a financial interest in has quite a bit of net income this year. So, what does one do when one has extra money, how about buy an airplane!!!

The entity is an LLC that is owned by two people (family members, one is a pilot), so the idea is to buy an airplane and allow the LLC to have some expenses. Both members think this is a good thing.

Legitimately, there should not be any problem having business needs for the plane, from the LLC, for 50 hours a year of flight time. There is a genuine business need.

Now, about the weekends and non-business needs to be flying to fun locations.

1.) What sort of personal use can be done without getting into trouble with the people who care about those types of things?

2.) Can the LLC make up some sort of requirement that the pilot be "proficient" and allow the LLC to pay for the expenses incurred by flying for non-business needs?

3.) Can the LLC pay for all the tie downs, insurance, maint, etc?

4.) Can the LLC pay for all the fuel?

5.) Can the Private Pilot fly customers to the LLC's business locations without being commercial pilot?


6.) Can the LLC pay for the pilot's expenses for the BFR?

7.) Anything else that can be charged to the LLC?



(Thanks in advance. I know this isn't medical, but the Unregistered feature was nice.)

 

[48dodge]

Subscribing because I am in a similar situation but I would be the only pilot for the company.

Sent from my SCH-I545 using Tapatalk

 

[mcmanigle]

I don't even pretend to be a lawyer, so I'll get an answer in first so all of the people here who either are or pretend to be lawyers can correct me

1.) What sort of personal use can be done without getting into trouble with the people who care about those types of things?

Not sure what the tax implications are, but see #4 for what I'll wildly put forward as a potential solution without knowing what I'm talking about at all.

2.) Can the LLC make up some sort of requirement that the pilot be "proficient" and allow the LLC to pay for the expenses incurred by flying for non-business needs?

Probably not if you're only a private pilot, since a company isn't allowed to require a PPL as a term of employment (I think), and therefore requiring proficiency would be even crazier...?

3.) Can the LLC pay for all the tie downs, insurance, maint, etc?

I don't see why not, if it's the LLC's plane...

4.) Can the LLC pay for all the fuel?

I'm sure I'll be corrected very shortly if I'm wrong, but the easiest way to go about this might be for the LLC to rent the plane to you (a private pilot) when you're using it for personal reasons for a relatively low (but not nothing) "wet" rate. Probably wouldn't be hard to argue that since the LLC needs its plane to be flown, it's in the corp's best interest to give a trusted pilot (ie you) a low rental rate for personal use.

5.) Can the Private Pilot fly customers to the LLC's business locations without being commercial pilot?

Pretty sure you're not going to find a way to fly passengers around in a business setting as a private pilot no matter how hard you look.

6.) Can the LLC pay for the pilot's expenses for the BFR?

Similarly to #2, probably not, because you can't be required to be a private pilot in a business setting.

7.) Anything else that can be charged to the LLC?

Yeah; enjoy my off-the-cuff comments and those of everyone who posts after me in seven different directions, but it sounds like the LLC should use some of its hard-earned money to get an actual legal opinion on this one. Especially if you care about things like taxes in the state you live, etc.

 

[mcmanigle]

Another possibility is that your LLC decides that it wants a commercial pilot in-house, and so decides to pay for a current partner's training to get that ticket. And if building cross-country hours is part of the requirement, so be it. Still can't carry passengers until that happens, though. And it might fall apart if you start having the LLC pay for hours that you don't need for the CPL.

 

[asgcpa]

Disclaimer: I have just gotten out of working 18 hour days for a month today, so I am burnt out and right now cannot think coherently, so if I am out in left field, please be gentle..... I have not thought this through, or done the proper research even thought I am a CPA, so right now I am shooting from the hip. Speak to your lawyer and accountant. But...

Create a separate LLC for the aircraft rental business. LLC would become the business. Have the new LLC act as an active aircraft rental (not passive) entity. Only potential issue could be related party rentals (similar conceptually to 14 day related party rental for vacation home issue but I have NOT researched this) so have your CPA research this. Although there might be additional expenses such as insurance, 100 hour inspections (which I believe you can turn into a rotating annual from what I have been told - please correct me if I was given erroneous advice) etc. That being the case, those expenses would be offset against income. Business would deduct the rental expense for legitimate business purposes. New LLC reports income, to offset expenses.

New LLC would rent out to the company and other individuals at a going rate (or slightly discounted) in the local market. Limit those who can rent, and have named pilots on insurance.

If I want to do this, I will research it on my own....but not now. Still too busy. Please let me know what you come up with.

 

[Flying Lizard]

I did something similar for 8 years. I'm no CPA, but from what I was told, it's pretty much common sense: You can write-off expenses that were for the business, and a percentage of fixed costs that's proportional to the business use of the plane. Really no different than a company car.

If you don't keep good records, or write-off expenses that weren't related or proportional to the business use, you can expect an audit to be very uncomfortable, at least.

 

[John221us]

Many businesses need storage for tax records and other items. Hangars are great for this type of storage. Just sayin....

 

[Daytonabch04]

The OP got me thinking...could a CFI buy a plane and create his own LLC and have the LLC/business "write off" the planes expenses since they would be a legitimate business expense?

 

[flyingron]

LLC or not if the plane is used to conduct a business, you can deduct business expenses. I had my plane on leaseback without an LLC. To answer Dayton's last question, yes a CFI can deduct (LLC or not) the expenses of the plane for conducting his CFI business.

As for the other questions, you can't use the plane for personal purposes and take a business deduction. You either have to exclude the expenses associated with the personal use (pro rated, or whatever) or as CPA suggests, you can just have the LLC RENT the plane to you at a reasonable rate.

All of the expenses mentioned (insurance, tiedowns, maintenance, fuel, etc... ) appear to be legitimate expense of a flying business. What you can't deduct is any overhaul or maintenance reserves you want. You can only deduct what you spend.

A private pilot would run afoul of flying customers REGARDLESS OF LLC OR NOT. The FAA frowns on that severely (there are a few very limited exceptions).

But it should be noted you just can't call something a business (LLC or not) and take deductions for it. You have to actually conduct yourself with a business motive. The IRS will consider things without business motives HOBBIES and disallow those deductions. There are a couple of ways of showing a business motive, but just having an LLC won't cut it.

 

[timwinters]

I'm not an accountant or an attorney but here's what I did when I had my construction company and had no issues with it.

1. The company (an "S" corp) bought my plane from me shortly after going into business.

2. All expenses for both the plane and pilot training were paid for by the company.

3. All personal use of the company plane was reimbursed at $100/hr for the first two years and then raised to $125/hr for the last 5 years (after gas went up).

4. When the company ceased operation, the plane and a truck were sold back to me.

5. At this time the company had no income but was still paying two employees so the loss generated by paying salaries countered the income from the equipment sale.

6. The two employees were investing nearly 100% of their salaries into SIMPLE and HSA accounts so there was very little, if any, income tax paid on those salaries.

win...win...

During my business years I survived numerous audits, both state and federal, without any incident. And, since I built in 13 states, my chances of an audit were increased proportionately. Illinois alone audited me three times (and I only did ONE job in that state that lapsed into two years).

As far as what constitutes personal use: Everything that's not strictly business related. This one must be played "straight-up" or it'll bite you.

OTOH, say you're going to a fly-in in...oh...say...Sidnaw, MI and you just happened to have built an O'Reilly in...oh...say...Clintonville, WI and the O'Reilly store just happened to be due for it's "one year warranty walk-thru".

I don't think I'd see a problem with considering home-CLI-home as a business expense and CLI-6Y9-CLI as personal and reimbursed accordingly. Just make sure you document the inspection with the store manager's signature before driving out to DuPont to get some cheese!

Again, the above is simply what worked for me without issue...consult a good accountant. My first two sucked and then I found a good one. Good being affirmed by my unscathed survival of all audits.

 

[asgcpa]

During my business years I survived numerous audits, both state and federal, without any incident. And, since I built in 13 states, my chances of an audit were increased proportionately. Illinois alone audited me three times (and I only did ONE job in that state that lapsed into two years).

Welcome to the world I practice in. The Illinois Department of Revenue is a PITA to deal with.

 

[timwinters]

Welcome to the world I practice in. The Illinois Department of Revenue is a PITA to deal with.

Condolences.

 

[Unregistered]

Thanks for the thoughtful answers.

As for the other questions, you can't use the plane for personal purposes and take a business deduction. You either have to exclude the expenses associated with the personal use (pro rated, or whatever) or as CPA suggests, you can just have the LLC RENT the plane to you at a reasonable rate.

How is the purpose of the flight determined? Does the IRS go after pilot logbooks? Or, does a plane log need to be maintained to show every flight? An hour of poking holes in the sky around the local area, no fuel purchases, no receipts, did the airplane fly?

All of the expenses mentioned (insurance, tiedowns, maintenance, fuel, etc... ) appear to be legitimate expense of a flying business. What you can't deduct is any overhaul or maintenance reserves you want. You can only deduct what you spend.

Good point, make sense. ............. Now got to thinking, that is EXACTLY what the depreciation expense would be for the plane. The IRS will allow you to depreciate the asset, so, you are, in a sort of way, getting the maintenance reserve.

A private pilot would run afoul of flying customers REGARDLESS OF LLC OR NOT. The FAA frowns on that severely (there are a few very limited exceptions).

How far does this go? Can you grab a sub-contractor and say "let's fly down and look at the job site"? Can you look at the job site with a customer, from above?

But it should be noted you just can't call something a business (LLC or not) and take deductions for it. You have to actually conduct yourself with a business motive. The IRS will consider things without business motives HOBBIES and disallow those deductions. There are a couple of ways of showing a business motive, but just having an LLC won't cut it.

The LLC is a legitimate business, making good profit and good cash flow. Just happens that one of the members of the LLC thinks owning a plane could help make life easier on some of the LLC business activities. The LLC members are paying a bunch in taxes, so, if owning the plane reduces the tax liability then it is a good thing, assuming a plane is needed.

 

[Unregistered]

Thanks for the answers and the time you spent.

I don't even pretend to be a lawyer, so I'll get an answer in first so all of the people here who either are or pretend to be lawyers can correct me



2.) Can the LLC make up some sort of requirement that the pilot be "proficient" and allow the LLC to pay for the expenses incurred by flying for non-business needs?

Probably not if you're only a private pilot, since a company isn't allowed to require a PPL as a term of employment (I think), and therefore requiring proficiency would be even crazier...?

Do the Dr's and all the other guys who go spend a week at Flight Safety get to deduct that training?

.

4.) Can the LLC pay for all the fuel?

I'm sure I'll be corrected very shortly if I'm wrong, but the easiest way to go about this might be for the LLC to rent the plane to you (a private pilot) when you're using it for personal reasons for a relatively low (but not nothing) "wet" rate. Probably wouldn't be hard to argue that since the LLC needs its plane to be flown, it's in the corp's best interest to give a trusted pilot (ie you) a low rental rate for personal use.

Just curious, but why "wet" instead of "dry"?

Yeah; enjoy my off-the-cuff comments and those of everyone who posts after me in seven different directions, but it sounds like the LLC should use some of its hard-earned money to get an actual legal opinion on this one. Especially if you care about things like taxes in the state you live, etc.

Probably the best advice getting actual legal and CPA advice, but Internet message boards also are entertaining, and sometimes there is a nugget of good advice.

 

[flyingron]

How is the purpose of the flight determined? Does the IRS go after pilot logbooks? Or, does a plane log need to be maintained to show every flight? An hour of poking holes in the sky around the local area, no fuel purchases, no receipts, did the airplane fly?

The IRS doesn't go after anything. They just state they think you're not using the plan for business use and it's up to you to prove otherwise. A good way to do this is with some form of contemporaneous record. Really as far as the IRS is concerned, this is not really any different than business use of a car. You can pull the IRS pub on business use of a car and follow that guidance.

Good point, make sense. ............. Now got to thinking, that is EXACTLY what the depreciation expense would be for the plane. The IRS will allow you to depreciate the asset, so, you are, in a sort of way, getting the maintenance reserve.

Not allow, require.

How far does this go? Can you grab a sub-contractor and say "let's fly down and look at the job site"? Can you look at the job site with a customer, from above?

If it has a reasonable business justification it's likely OK. This sounds legit if it serves a purpose (you had so need to look at the job site).

 

[Unregistered]

I'm not an accountant or an attorney but here's what I did when I had my construction company and had no issues with it.



4. When the company ceased operation, the plane and a truck were sold back to me.




As far as what constitutes personal use: Everything that's not strictly business related. This one must be played "straight-up" or it'll bite you.

.

Was your plane depreciated while the Corp owned it? Did you buy it back at the value remaining on the books or at market value?


Did you find the plane had to be more "straight up" than the company car you drove? Is that because of log books and flight plans?

 

[asgcpa]

Thanks for the thoughtful answers.

A. How is the purpose of the flight determined? Does the IRS go after pilot logbooks? Or, does a plane log need to be maintained to show every flight? An hour of poking holes in the sky around the local area, no fuel purchases, no receipts, did the airplane fly?


B. Good point, make sense. ............. Now got to thinking, that is EXACTLY what the depreciation expense would be for the plane. The IRS will allow you to depreciate the asset, so, you are, in a sort of way, getting the maintenance reserve.


C. How far does this go? Can you grab a sub-contractor and say "let's fly down and look at the job site"? Can you look at the job site with a customer, from above?

D. The LLC is a legitimate business, making good profit and good cash flow. Just happens that one of the members of the LLC thinks owning a plane could help make life easier on some of the LLC business activities. The LLC members are paying a bunch in taxes, so, if owning the plane reduces the tax liability then it is a good thing, assuming a plane is needed.

Ok I will try to answer without getting too deep. As always, the standard disclaimer applies. - I do not know your situation. Consult with your tax adviser. But here are my thoughts:

A. IRS would want to review the plane logs. If you have an LLC just for the plane rentals, it will not make a difference who rented if the Aircraft LLC (Partnership) was being audited. The IRS would look for under reporting of income (which is fraud depending on amount of understatement) If the corporation was being audited, you would need to prove the necessity of the trip and provide invoices and cancelled checks/credit card receipts for payment. In my experience defending taxpayers, this should be (but may not be always the case - notice the disclaimer) the case. Depending on how much you fight depends on how reasonable the agent is, but, if you can out line and contemporaneously document the need and expenses (SC Cohen rule) you should be ok and if the agent gives a hard time, move it up the ladder. NOTE: A TAXPAYER SHOULD NEVER REPRESENT THEMSELVES IN FRONT OF THE IRS. AN EA, CPA OR TAX ATTORNEY PROVIDES A BUFFER.

B. The Aircraft LLC should take depreciation. The rule is even if depreciation is NOT taken, the IRS will take it off. They follow the adage "depreciation allowed or ALLOWABLE". SO lets say you do not take depreciation and the LLC is audited, and depreciation was not taken for 3 years, you lose the three years of depreciation if returns cannot be amended to Statute of Limitations. Then you sell the plane, and you cannot include the missed depreciation, so the overall capital gain and ordinary income in aggregate over the life of the LLC is higher than it would have been.

C. You can do whatever you like. The aircraft LLC wouldn't have to do anything, just the operating company would have to document the trip.

D. Speak to your CPA, but if you were my client, I would suggest a separate LLC for the aircraft rental. It would be a little more bookkeeping, but would keep records cleaner.

Hope this helps

 

[timwinters]

Was your plane depreciated while the Corp owned it? Did you buy it back at the value remaining on the books or at market value?


Did you find the plane had to be more "straight up" than the company car you drove? Is that because of log books and flight plans?

Depreciated, yes.

Bought back at Market Value.

Company truck was only used for company business. I had a personal truck too.

 

[Tony_Scarpelli]

My undergrad is in accounting and my specialty was tax but I never practiced as a tax consultant although I did prepare taxes a bit through grad school.

If you put a plane in an entity LLC or S or C corp and then put it on rental but only 2 people rent it, I think IRS will smell something fishy and audit everyone involved disallow it something about arms length transactions and sham company.

You might consider actually really buying an airplane that you actually do put on lease back with the FBO or club so at least 5 other people rent it in addition to the owners and then rent it by your income producing company when you use it for business. I think your company can require you keep current as well. But obviously you will have to pay for some personal flight time.

But if you are creative all of your travel and vacations will cooinside with business seminars and meeting in interesting places so that the travel is tax deductible.

I had my non paid "advisory board" members who lived in Palm Springs, CA and we required quarterly meetings.

If you own a 2nd home in El Paso then it is going to be a little tough to write off weekend trips to El paso every weekend. But you can always open a branch office there and this too can be solved.

I looked into this and could have made it work but in the end I thought it too high of visibility to create unnecessary complications in my life. The write offs would be less than $10k per year and it wasn't worth the attention. There are way better ways to lower taxes without getting unwanted attention....cars, trucks., property, warehouses, rental property... If you are not already doing all the low lying fruit of deductions: medical savings accounts, maxed out SEP or retirement and such it makes no sense to me to mess with something this high of visibility and risk. Does not matter how easily you pass the audit, it is the time and resources to go through them and distraction from your real business that upsets me.

After my tax training I had bought real estate rentals and I had taken every legitimate deduction, standard mileage you name it.....I was audited every year for 5 years. I was not covering that much income but I was popping up on the radar line no ones business. I passed the audits but lost the war so to speak so I just stopped doing anything although legal but highly visible. So unless you are talking about a $759k New Matrix and 179 deduction, I don't think its worth it.

To show you how sincere I am about this, I had 3 stores with 15 employees and made my Cherokee available to all employees to use for their own PPL lessons they only had pay for their gas and instructor. So I would easily have been able to deduct much of the plane as an employee club expense ligitmately.....However I never deducted a dime.

 

[denverpilot]

The write offs would be less than $10k per year and it wasn't worth the attention.

I wondered when someone was going to point this out.

My accountant is great at doing these guesstimates first before messing with any of these things. He can tell ya in five minutes on the phone whether or not any particular deduction will be worth the effort. If you're the type that just must do every little deduction and get audited constantly, he's more than happy to charge appropriately and do all the work, but his advice is often to let sleeping dogs lie because it'll only save pennies.

He says he does have clients who've been shown that their pet deductions don't even pay for his extra hours working on them, but they are just blinders-on, must-do-every-deductiion types.

 

[Unregistered]

Ok I will try to answer without getting too deep. As always, the standard disclaimer applies. - I do not know your situation. Consult with your tax adviser. But here are my thoughts:

A. IRS would want to review the plane logs. If you have an LLC just for the plane rentals, it will not make a difference who rented if the Aircraft LLC (Partnership) was being audited. The IRS would look for under reporting of income (which is fraud depending on amount of understatement) If the corporation was being audited, you would need to prove the necessity of the trip and provide invoices and cancelled checks/credit card receipts for payment. In my experience defending taxpayers, this should be (but may not be always the case - notice the disclaimer) the case. Depending on how much you fight depends on how reasonable the agent is, but, if you can out line and contemporaneously document the need and expenses (SC Cohen rule) you should be ok and if the agent gives a hard time, move it up the ladder. NOTE: A TAXPAYER SHOULD NEVER REPRESENT THEMSELVES IN FRONT OF THE IRS. AN EA, CPA OR TAX ATTORNEY PROVIDES A BUFFER.

At present, there was NO plan to have a 'single asset LLC' with the plane. The original idea is that the current operating AND profitable LLC has plenty of cashflow, revenue, AND profit that needs to have some offsetting expenses. PLUS, using the plane as a business asset will likely IMPROVE the business (or, at a minimum, save the wear and tear on the Member who is doing lots of 5 hour drives). Quite a bit of the revenue to the LLC comes from a location 5 250 miles away, so expenses to get there should be easy to justify to the IRS.

Is there a good reason, other than liability, NOT to have the plane in the Operating Company LLC? (Instead of setting up a single asset LLC for the plane, and then renting the plane?)

B. The Aircraft LLC should take depreciation. The rule is even if depreciation is NOT taken, the IRS will take it off. They follow the adage "depreciation allowed or ALLOWABLE". SO lets say you do not take depreciation and the LLC is audited, and depreciation was not taken for 3 years, you lose the three years of depreciation if returns cannot be amended to Statute of Limitations. Then you sell the plane, and you cannot include the missed depreciation, so the overall capital gain and ordinary income in aggregate over the life of the LLC is higher than it would have been.

Was hoping to depreciate the plane INSIDE the Operating Company LLC, and, haven't researched yet, but hoping for some sort of accelerated depreciation to offset 2013 income.

C. You can do whatever you like. The aircraft LLC wouldn't have to do anything, just the operating company would have to document the trip.

I am guessing that won't be hard. Making lots of those trips with plenty of documentation via auto/PU. Question is more about trips that won't have any documentation. VFR, no gas purchase, no hotels, no paper trail? (ie.... $100 hamburgers)

D. Speak to your CPA, but if you were my client, I would suggest a separate LLC for the aircraft rental. It would be a little more bookkeeping, but would keep records cleaner.

Hope this helps

Can you offset the expenses and losses in the Aircraft LLC against the income and revenue in the Operating Company LLC?

And, thanks for the time and thought. It is appreciated.

 

[Unregistered]

I wondered when someone was going to point this out.

My accountant is great at doing these guesstimates first before messing with any of these things. He can tell ya in five minutes on the phone whether or not any particular deduction will be worth the effort. If you're the type that just must do every little deduction and get audited constantly, he's more than happy to charge appropriately and do all the work, but his advice is often to let sleeping dogs lie because it'll only save pennies.

He says he does have clients who've been shown that their pet deductions don't even pay for his extra hours working on them, but they are just blinders-on, must-do-every-deductiion types.

Interestingly, the 5 minute conversation I had with my CPA was he was completely excited and said to do it, and even advised putting it in the Operating Company LLC (vs. an S-Corp we also have vs. Personally owning it), however, sometimes I am not sure he and I are speaking the same language when it is face to face.

As far as fear of being audited, the business we are in is multiple states, employing people in multiple states, paying taxes and collecting taxes in multiple states, operating trucks in multiple states, buying diesel in multiple states, covering Worker's Comp in multiple states, etc.... We generally have 1-2, sometimes 3 different audits each year, of some sort, by some government agency. Just a fact of business. We are completely on the "up and up", and most times we pass with flying colors. Occasionally, a small clerical error is found and we have to adjust, but audits don't worry me. I do agree they are time consuming, but, I figure they are the cost of business.


I am not even completely sure what would be "creative" or a "red flag" if the LLC is paying for the Plane, Hangar, Maint, and Insurance. Any "personal" gas could be hauled in for mogas, or could be bought on a personal credit card. Unless somehow the IRS wants the Hobbs meter on Jan 1 vs. Hobbs meter on Dec 31, and wants a full accounting.

 

[mcmanigle]

Unless somehow the IRS wants the Hobbs meter on Jan 1 vs. Hobbs meter on Dec 31, and wants a full accounting.

Not sure if they'd want that or not, but if you had it, it would make life really really easy...

 

[asgcpa]

At present, there was NO plan to have a 'single asset LLC' with the plane. The original idea is that the current operating AND profitable LLC has plenty of cashflow, revenue, AND profit that needs to have bsome offsetting expenses. PLUS, using the plane as a business asset will likely IMPROVE the business (or, at a minimum, save the wear and tear on the Member who is doing lots of 5 hour drives). Quite a bit of the revenue to the LLC comes from a location 5 250 miles away, so expenses to get there should be easy tho justify to the IRS.

Is theore a good reason, other than liability, NOT to have the plane in the Operating Company LLC? (Instead of setting up a single asset LLC for the plane, and then renting the plane?)




Was hoping to depreciate the plane INSIDE the Operating Company LLC, and, haven't researched yet, but hoping for some sort of accelerated depreciation to offset 2013 income.




I am guessing that won't be hard. Making lots of those trips with plenty of documentation via auto/PU. Question is more about trips that won't have any documentation. VFR, no gas purchase, no hotels, no paper trail? (ie.... $100 hamburgers)





Can you offset the expenses and losses in the Aircraft LLC against the income and revenue in the Operating Company LLC?

And, thanks for the time and thought. It is appreciated.

Yes you can offset LLC against LLC. Wondering why your CPA doesn't want to separate. The reason to separate is to keep it cleaner and not open up the originsl operating to the potential of an audit.

 

[Sam D]

...profit that needs to have some offsetting expenses.

Bad reason.

PLUS, using the plane as a business asset will likely IMPROVE the business (or, at a minimum, save the wear and tear on the Member who is doing lots of 5 hour drives).

Good reason.

In short, make the business decision first and then figure out the best tax approach. (put another way, don't let the tax tail wag the business dog).

It is ok to have profits.

 

[N747JB]

Bad reason.



Good reason.

In short, make the business decision first and then figure out the best tax approach. (put another way, don't let the tax tail wag the business dog).

It is ok to have profits.

+1
I've never written off airplane expenses, my CPA pretty much told me it would trigger an audit, and it's mostly personal use.
Make sure you document everything, maintenance flights are deductible, but they have to be logged, business trips are certainly deductible, but you must separate them from personal trips and account for EVERY HOUR. Our friends at the IRS like detailed records, sloppy records and an airplane will not end well. If you have legitimate business need for an airplane there is no reason you can't buy and expense it! Just be careful.

 

[JimNtexas]

If you want to know how to not handle a business aircraft purchase, consider the case of Edmond Audrey & Lydia Rose Heinbockel v. Commissioner (Tax Ct. 2013).

Ed Heinbockel was a life long aviation enthusiast and entrepreneur. He created one of the first popular computer games, "Leisure Suit Larry".

In 2004 Ed got a large government contract to produce training software. Ed felt that scope of this contract justified a business aircraft so he bought a Mooney Encore and titled it in a single purpose LLC, "Collective Flight". He even got a 135 certificate, but Collective Flight's only customer was Ed's company.

The Schedule C activity was Ed’s. He called it Collective Flight, and he

argues that it was a one-airplane transport company. Collective Flight was not

Ed’s first foray as a pilot. He began flying when he was only 15, went solo at 16,

and won his private license by 17. He credibly defined flying as his “passion”,

and he later became a commercial- and instrument-rated pilot. When VP won its


[*8] contract with Homeland Security in 2004, Ed saw an opportunity to combine

his love for flying with VP’s business. He decided that he “really needed an

airplane” and that VP, as his “anchor client,” “was going to be the prime mover on

this.” He bought a Mooney Encore, a four-passenger single-engine aircraft.

Although Ed testified that he bought it for business purposes, the documents he

signed to buy the airplane suggest otherwise: The loan agreement had a space to

complete the following clause: “This Property will be used for _______ purposes.”

The word “PERSONAL” was typed in that space.3

Collective Flight never really got off the ground. As Ed put it, his “best-laid

plans didn’t work out so well.” Although Ed occasionally flew the plane to

transport himself for VP-related trips, he typically used commercial airlines.

When Ed did use his own plane, he often decided against having VP reimburse

Collective Flight because of VP’s cashflow problems. And Ed never did find any other revenue sources to lift Collective Flight closer to profitability. He was unable to convince any of his other contacts to become clients because, according to Ed, they were looking to fly in a nicer twin, cabin-class airplane.

Collective Flight’s income did not soar. Although it managed to gross about

$30,000 in 2006, it reported less than $4,000 for 2005 and $6,000 for 2007. And its reported expenses dwarfed that gross revenue. Those expenses ranged from nearly $100,000 in 2005, to about $75,000 in 2006 and 2007. The aggregate net loss for these years was nearly $210,000.

Ed didn't really keep records about the business use of his Mooney, nor did he consult with a professional about his airplane business. If you read the footnotes in the case, you'll also see that the judge was not amused when Ed's lawyer submitted the airplane loan documents to the court the words 'personal use' had been redacted from the original copy Ed had provided the IRS during the audit.

Ed was also very upfront about his love of flying. That didn't help his case either.

The judge sided with the IRS and disallowed almost all of the airplane related deductions because Ed had an airplane hobby, not an airplane business.

Elements of personal pleasure

The final factor we examine is whether the activity had elements of personal

pleasure or recreation. See sec. 1.183-2(b)(9), Income Tax Regs. There is no doubt

that there are plenty of them here. Ed testified, “ I love to fly. I’ll be real up-front

about that. Flying’s always been a passion of mine.” We find his testimony

credible. Ed had bought several other planes in the past and even owned a

helicopter. The presence of Ed’s personal passion to pilot planes--especially in light

of the other factors--weighs heavily against him. See id.

10. Totality of the factors

After considering all facts and circumstances, we find that Ed has not shown

that he engaged in the Collective Flight activity for profit. (emphasis added)The Heinbockels are therefore not entitled to the deductions that they claimed to the extent that the deductions exceed the income Collective Flight reported.

 

[0luke1]

My company has audited books, I must be completely legit. My accountant said "unlike many of my other clients who ask about this, you have a legitimate business use of an aircraft." The LLC that will own the aircraft will show a profit because it will lease the aircraft to me for a profit - however, I will get the full benefit of the special 179 deduction because I own the leasing LLC. In essence, the aircraft will not cost me much as a result, although I will pay for my flight time - and any personal use will be paid by me with after tax dollars. This is the only business decision I've made considering tax implications. Otherwise I just do business and accept taxes as a cost of doing business, despite how irritating it is to see guys like Gov Romney and Apple Computer getting to play by different rules.

The special section 179 rules will probably not be repeated.

By the way, when I sell the aircraft, it will count as income - unless the proceeds are plowed into another aircraft. Which will be my excuse to buy an Epic in a year or two.

Btw, I've heard of creative ways to avoid sales tax - but it's completely indefensible in an audit. You can open up a huge can of worms if you play fast and loose in other areas. Not worth it as far as I'm concerned - and I don't play fast and loose.

 

[Unregistered]

Yeah, no attempts at avoiding sales tax. It is what it is.


Still trying to figure out the paper trail for showing use of the plane.


One of my companies has a $5-10k per month fuel bill. Buying MoGas would not cause any sort of blip in the fuel expense. I could fly a lot of hours and not raise any red flags. (Assuming I am not greedy and try and get back the road tax on state income taxes.)

All the monthly and fixed costs are owed by the LLC if it flies 1 hour or 100, still got hangars, insurance, and maint.

The only potential would be writing off fuel in Vegas on 3 day weekends if I put them on a company credit card. Put it on the personal card, slim chance it ever sees the light of an audit.


The depreciation is likely as important as the operating deductions.

 

[Tony_Scarpelli]

Just have an aircraft log, submit the gas purchases to the LLC for reimbursement. Use the aircraft log to track % of costs.

IRS will likely want you to pay more than fuel costs for personal use anyway. So total costs for your plane $110k 12% personal use hrs personal costs should be $13300.

Yeah, no attempts at avoiding sales tax. It is what it is.


Still trying to figure out the paper trail for showing use of the plane.


One of my companies has a $5-10k per month fuel bill. Buying MoGas would not cause any sort of blip in the fuel expense. I could fly a lot of hours and not raise any red flags. (Assuming I am not greedy and try and get back the road tax on state income taxes.)

All the monthly and fixed costs are owed by the LLC if it flies 1 hour or 100, still got hangars, insurance, and maint.

The only potential would be writing off fuel in Vegas on 3 day weekends if I put them on a company credit card. Put it on the personal card, slim chance it ever sees the light of an audit.


The depreciation is likely as important as the operating deductions.

 

[0luke1]

The depreciation is likely as important as the operating deductions.

Especially this year - with the $500,000 allowance for used aircraft, if you're paying enough taxes, you can expense the entire thing this year and save enough for two years of operating expenses and depreciation!