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IRS Issues Proposed Regulations on Bonus Depreciation

IRS Issues Proposed Regulations on Bonus Depreciation

A recently issued notice of proposed rulemaking from the IRS on the extension and modification of 100 percent bonus depreciation includes key recommendations from NBAA’s formal request for guidance on the deprecation changes passed into law as part of the Tax Cuts and Jobs Act (TCJA).

The TCJA amended the Internal Revenue Code to provide 100 percent bonus depreciation for both qualifying new and used property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027. For tax years after 2022, there is a phase down of bonus depreciation in increments of 20 percent each year for qualified property acquired and placed in service before Jan. 1, 2027.

The extension of bonus depreciation to used property was a significant legislative victory for NBAA, and since passage, the association has requested specific guidance on how the provision applies to business aviation. Under the TCJA, used property can only qualify for bonus depreciation if it was not “previously used” by the taxpayer. In its guidance request, NBAA explained that a taxpayer conducting incidental use of an aircraft, such as chartering or demonstration flights, and then ultimately purchasing the aircraft, should not disqualify the acquisition from bonus depreciation. View NBAA’s formal request for guidance. (PDF)

“The definition of ‘previously used’ in the proposed regulations is very taxpayer-favorable. So long as the taxpayer never owned the property or had the right to depreciate it in the past, the property can potentially qualify for bonus depreciation,” said John Hoover, a partner at Holland & Knight LLP and vice chair of NBAA’s Tax Committee. “An aircraft is considered previously used by the taxpayer only if the taxpayer had a depreciable interest in the property before buying it.”

The clarification regarding “previously used” is important, as it broadens the types of transactions that could potentially qualify for bonus depreciation.

“For example, if a taxpayer leased an aircraft from an owner and decided to buy it, the aircraft could be eligible for bonus depreciation,” explained Glenn Hediger, CPA and president of Aviation Financial Consulting, LLC. “Similarly, if an individual chartered an airplane and later decided to purchase it, it could still be eligible for 100 percent bonus depreciation.”

Another clarification relates to when an aircraft is “acquired” for purposes of bonus depreciation. For example, if a taxpayer entered into a binding written contract with a manufacturer to build an aircraft in July 2017, but “physical work of a significant nature” didn’t begin until October 2017, was the aircraft acquired after Sept. 27, 2017 and thus eligible for 100 percent bonus depreciation?

The proposed regulations explain the aircraft is considered “acquired” no later than the date of a binding written contract to build it, even though physical work on the aircraft and actual delivery may occur later. In the example above, the aircraft would not be eligible for 100 percent bonus depreciation because the binding written contract was entered into prior to Sept. 27, 2017.

“NBAA appreciates the work of the IRS and Department of the Treasury to issue these proposed regulations, and we are grateful to see that their position on application of bonus depreciation to used property is consistent with our guidance request,” said Scott O’Brien, NBAA’s senior director of government affairs.

Taxpayers may rely on the proposed regulations for qualified property acquired and placed in service after Sept. 27, 2017.

View the full notice of proposed rulemaking. (PDF)

by NBAA

2018-09-27T15:03:33+00:00 September 27th, 2018|Aircraft Tax, Aviation News, Blog, Economics of Aviation|

NATA Sees More Enforcement on Illegal Charter Ahead

NATA’s newly formed Illegal Charter Task Force is hoping to see increased enforcements against so-called gray charter practices as it continues to work with the FAA to highlight the issue. The association pointed to a June 29 announcement of a proposed civil penalty for illegal charter activity, and said, “This penalty brings to light the ramifications for operating an illegal charter business, and it’s expected that more will come.”

The FAA is proposing a $3.3 million civil penalty against The Hinman Co. of Portage, Michigan, the agency said, “for conducting hundreds of commercial aircraft operations in violation of the Federal Aviation Regulations, including failing to hold the required operator certificate for the flights being performed.” This activity occurred through Hinman’s subsidiary Hincojet and involved a Beechcraft Beechjet 400A and a Hawker 900XP, the agency added.

The company has 30 days to respond to the allegations, which include double-billing clients, charging more than permissible under Part 91, and failing to comply with Part 135 record-keeping and training requirements.

NATA in recent years has been meeting with the FAA over the issue, as illegal charter has been a long-standing concern. These concerns culminated in the formation of the Illegal Charter Task Force, which held its first meeting during NATA’s annual meeting and aviation business conference last month.

During that meeting, the task force focused on defining illegal charter and distinguishing between intentional and unintentional non-compliance. “Illegal charters bypass the FAA’s safety standards in order to undercut the pricing of legitimate businesses by creating a potential safety hazard, putting legitimate operators at a competitive disadvantage, and dodging the payment of appropriate federal excise taxes,” NATA said. “The goal of the task force is to work in conjunction with industry and the FAA to identify operators that attempt to evade the rules and regulations that constitute a legal charter operation, and ensure the protection, safety, and integrity of an industry held to a very high standard.”

by Kerry Lynch

– July 3, 2018, 10:47 AM

 

2018-07-03T14:56:08+00:00 July 3rd, 2018|Aircraft Tax, Aviation News, Blog, Government Regulation|

100% Depreciation and Aircraft Personal Use

Can a prospective aircraft owner benefit from claiming 100 percent “bonus depreciation” even though the owner expects to fly the aircraft for personal use? Yes, with limitations and careful structuring under the Internal Revenue Code (IRC). However, in doing so, it is essential to harmonize potentially conflicting rules in the IRCwith the Federal Aviation Regulations (FARs) and state law, including sales/use tax laws.

The Tax Cuts and Jobs Act of 2017, which became law on December 22, for the first time allows aircraft owners temporarily to take 50 percent or 100 percent bonus depreciation deductions on preowned aircraft. It also doubles the pre-existing 50 percent bonus depreciation to 100 percent of the cost of certain new aircraft.

A business taxpayer who owns an aircraft can take 100-percent bonus depreciation deductions under the IRCagainst gross income if it uses the aircraft in its trade or business or for production of income. However, an owner cannot take depreciation deductions for personal use, including entertainment, amusement, or recreation.

The IRC allows certain owners to deduct depreciation from gross income by two methods. The first is straight-line depreciation created under the Alternative Depreciation System. This allows owners to take equal depreciation deductions each year of the “recovery period”—the years to fully write off aircraft. That is six years for aircraft operated under Part 91 and 12 years for aircraft operating under Part 135.

The other depreciation method is the Modified Accelerated Cost Recovery System (MACRS). MACRS allows an owner to write off its aircraft and certain helicopters in five years for Part 91 usage and seven years for Part 135 usage. An owner must qualify for MACRS to claim either 100 percent or 50 percent bonus depreciation.

IRC Section 280F prescribes that an aircraft must be “predominantly used in a qualified business use for any taxable year.” This deceptively simple idea presages complex rules about claiming depreciation deductions, including 100 percent bonus depreciation, on mixed personal and business use of aircraft.

It also contains a leasing trap: qualified business use normally does not include leasing aircraft to any 5 percent owner or related person, such as a family member. This rule could prevent an aircraft from qualifying for MACRS(and, by extension, for 100 percent bonus depreciation).

Further, the tax law introduces a new ambiguous requirement—to qualify for 100-percent bonus depreciation, “the original use” of the aircraft must begin with the taxpayer. It is unclear what this means, especially the word “use,” or how it affects new or preowned aircraft. The regulatory morass and value of tax reduction demand careful structuring and calculations to mitigate these risks.

Despite the best business planning, personal use inevitably happens. When it does, owners must calculate the “entertainment disallowance percentage” attributable to their personal use—the portion of entertainment use relative to total flight time or hours.

I often hear prospective owners worry that their personal use might unravel the benefits of 100-percent bonus depreciation, but a special regulation allows an owner to elect and calculate the disallowance in year one on a straight-line basis, spreading out depreciation over six or 12 years.

Once an owner takes 100 percent bonus depreciation, there is no depreciation expense left to deduct starting in year two. As a result, if the owner elects straight-line, the disallowed deduction will be a much smaller amount and, correspondingly, the economic benefit of 100 percent bonus depreciation to the owner should be greater. This approach enables an owner to maximize tax savings and minimize the adverse effect of personal use on bonus depreciation.

Planning for depreciation benefits alone is not enough. Even if the aircraft owner designs the structure to comply with the tax law, that is irrelevant to the FAA. As a result, owners should anticipate facing other structuring hurdles due to potential conflicts of the IRC with the FARs and other laws, particularly state sales- and use-tax laws. For example, under a very common ownership structure, the FARs might compel an owner to push operational control out of certain limited liability companies to persons permitted to operate the aircraft under the FARs.

Although taking that step might avoid conducting illegal flight operations in a “flight department company,” the structure might involve leasing the aircraft to 5 percent owners and related persons. Similarly, 5 percent members of an LLC aircraft owner might lease the aircraft to themselves or related persons to spread out sales tax over a lease term. Owners should vet any such structure as it might run afoul of owner qualifications for MACRS.

With strong interest in tax benefits afforded by the tax law, potential purchasers might join committed ones and “pull the trigger” to acquire a new or preowned aircraft. If, in any aircraft purchase, the prospective owner properly structures its transaction to claim bonus depreciation consistent with the rules in the IRC, the FARs, and state tax laws, bonus depreciation should lower the owner’s cost of capital, increase its after-tax cash flow and reduce its federal tax bill. The value proposition seems obvious, but each owner must decide whether taking bonus depreciation when purchasing an aircraft is worth its while.

The author would like to thank Julianne Christensen, managing member of AeroCPA, LLC, for her extensive assistance on this story.

 – March 8, 2018
2018-03-15T09:03:31+00:00 March 15th, 2018|Aircraft Tax, Aviation News, Blog|

Bonus Depreciation

Bonus depreciation may allow aircraft owners to realize the depreciation benefits of an eligible asset more quickly. Aircraft owners are not entitled to more depreciation, but are allowed to obtain the benefits of depreciation more quickly. When available, bonus depreciation can be utilized by owners of many capital assets and is not an aviation specific benefit.

The U.S. House and Senate have approved extensions of bonus depreciation on numerous occasions, which affirms what many industry analysts and economists understand – that businesses are unable to fully deduct the initial cost of capital investments, including those made in new aircraft, as they do with labor and raw material. Instead, they must write these costs off over many years, and, as a result, never recoup the full value of investments that drive economic growth.

Bonus depreciation delivers long-term stimulus to industries like general aviation, which provides high-skill, and high-paying, jobs for more than 1.1 million Americans, and is responsible for generating $219 billion in economic activity in the United States annually. It also gives American companies access to advanced equipment, including aircraft, making them more competitive, while preserving jobs in aviation-related manufacturing, one of the few industries that contributes positively to America’s trade balance.

The 2017 Tax Cuts and Jobs Act provides for 100 percent bonus depreciation, allowing taxpayers immediate deduction of the cost of aircraft acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2027 (Jan. 1, 2028 for longer production period property and certain aircraft). Through the efforts of NBAA and a coalition of general aviation groups, the new law permits 100 percent bonus depreciation for both factory-new and pre-owned aircraft so long as it is the taxpayer’s first use of the aircraft.

Learn More about New Depreciation Rules Under the 2017 Tax Act.

By NBAA

2018-02-12T10:57:46+00:00 February 12th, 2018|Aircraft Tax, Blog, Economics of Aviation|

Tax Reform Highlights for Business Aviation

The House and Senate have both voted to pass major tax reform legislation, and are expected to send the Tax Cuts and Jobs Act (“Tax Bill”) to the president for his signature before Christmas. The legislation contains important changes for business aviation in several areas.

100-Percent Expensing (Bonus Depreciation)

A 2015 Act extended bonus depreciation for qualified property (including commercial and non-commercial aircraft used in a trade or business with a recovery period of 20 years or less) through 2019, with a phase-down over time from 50 percent to 30 percent.

Under the Tax Bill, however, the current law would be amended to provide for 100-percent expensing, which will allow taxpayers immediately to write off the cost of aircraft acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023 (Jan. 1, 2024 for longer production period property and certain aircraft). Through the efforts of NBAA and a coalition of general aviation groups, the new law would permit 100 percent expensing by the taxpayer for both factory-new and pre-owned aircraft so long as it is the taxpayer’s first use of the aircraft.

For tax years after 2022, the bill provides for a phase down of bonus depreciation in increments of 20 percent each year for qualified aircraft acquired and placed in service before Jan. 1, 2027 (Jan. 1, 2028 for longer production period property and certain aircraft).

Like-Kind Exchanges

Under current law, when property (including business aircraft) held for productive use in the taxpayer’s trade or business or for investment is exchanged for property that is “like-kind,” a special rule under Internal Revenue Code (IRC) § 1031 provides that no gain or loss is recognized to the extent that the replacement property is also held for productive use in a trade or business or for investment purposes.

The Tax Bill modifies this special rule only to allow for like-kind exchanges of real property. As a result, taxpayers will no longer be eligible to defer taxable gain on the sale of aircraft via a like-kind exchange, and the gain would be subject to recapture for tax purposes. This provision is effective for transfers after 2017, and is a permanent repeal of application of IRC § 1031 rules to exchanges involving aircraft and other tangible personal property.

However, a transition rule preserves like-kind exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017. Further, 100 percent expensing of new and used property helps to compensate for the repeal of like-kind exchanges for tangible personal property, though unlike such repeal and as noted above, 100 percent expensing is scheduled to expire in 2023/2024 with an additional phase down until 2027/2028.

Prohibition on Deduction of Employees’ Commuting Expenses

The Tax Bill prohibits employers from deducting the cost of providing transportation to employees to commute between the employee’s residence and place of employment unless provided for the safety of the employee. It is unclear whether this new provision would allow the deduction of commuting expenses included in income, and if so, whether such deduction is limited to only the actual amount of the expense included in income.

Disallowance of Travel Expenses “Directly Related” to Business

The Tax Bill makes far-reaching changes to the basic deduction disallowance rules for business entertainment which could affect many aircraft owners. Historically, the general rule of IRC § 274 disallowed all entertainment expenses (assuming no exception applied) unless directly related or associated with the active conduct of the business. Therefore, the 100 percent deduction disallowance did not apply to the entertainment of business customers, prospective clients, company retreats and other entertainment events where business was conducted immediately before, during or after the entertainment, or the entertainment was clearly associated with a business goal unrelated to providing the entertainment such as the opening of a new business location. Beginning in 2018, the Tax Bill disallows all entertainment expenditures, regardless of whether they are directly related to a business goal.

Repeal of Miscellaneous Itemized Deductions, Including Employee Business Expenses

The Tax Bill eliminates miscellaneous itemized deductions, including employee business expenses beginning in 2018 and before Jan. 1, 2026. Prior to the amendment, employees could deduct expenses incurred in performing their work, subject to the limitation that such expenses (along with other miscellaneous itemized deductions) were only deductible to the extent that the total of such expenses exceeded 2 percent of adjusted gross income.

The 2% floor was a simplification measure in the 1986 Tax Act under which very few taxpayers needed actually to calculate their miscellaneous itemized deductions. For the same reason, eliminating the deduction is expected to affect relatively few taxpayers. However, the effect on the taxpayers whose adjusted gross income is not extremely high and who are currently able to deduct their aircraft expenses as employee business expenses to the extent they exceed the 2 percent floor could be substantial. Such taxpayers may want to consider restructuring their compensation arrangements into accountable plan arrangements, which are not affected by the Tax Bill.

Transportation Excise Tax Does Not Apply to Owner Flights on Managed Aircraft

The Tax Bill also amends IRC § 4261 by adding a new subsection to clarify that owner flights on managed aircraft are not subject to Federal Transportation Excise Tax (FET) ticket tax, but rather are subject to the non-commercial fuel tax. This issue has been the subject of controversy for more than 60 years, and this amendment clarifies the law consistent with the understanding of most people in the industry.

The FET exception applies to payments by the aircraft owner (or lessee) for aircraft management services related to maintenance, support or flights on the aircraft. The exception does not actually require that the owner be on the flight or that the flight be on the business of the owner, but only that the owner (or lessee) pay for the aircraft management services.

“Aircraft management services” are defined broadly, and no distinction is drawn between payments for aircraft management services versus payments for transportation services. It is sufficient that the payments by the owner (or lessee) ultimately cover the aircraft functions identified in the statute as aircraft management services. Since the only requirement is that the payments for aircraft management services be made by the owner or lessee, there appears to be no need to analyze whether or not the management company exercises possession, command and control of the aircraft.

The amendment includes new IRC § 4261(e)(5)(D) that appears to provide that if a portion of any payment is for taxable transportation but such portion is not paid for “aircraft management services,” then such portion of the payment is taxable. While this provision could cause confusion, we believe it is intended to mean that when a payment includes a taxable portion (such as payment for a flight on an aircraft not owned by the payor) and a nontaxable portion (such as payment with respect to a flight on an aircraft owned by the payor), only the taxable portion is subject to FET.

The FET exception only applies with respect to flights paid for by the owner or lessee. Accordingly, if an owner leases the aircraft to a management company, and an affiliate of the owner pays the management company for the flight, the exception would not appear to apply. In contrast, if the aircraft owner leases the aircraft to its affiliate and the affiliate (being a lessee) pays the management company for services related to the flight, then the exception would apply.

Entities that may be disregarded for income tax purposes (such as single-member LLCs, qualified subchapter S subsidiaries and grantor trusts) are respected as separate entities for FET purposes and can expect to be respected for purposes of this exception. For example, if a company owns a single-member LLC which owns an aircraft, the FET exception would not appear to apply to payments by the company to a management company to manage the aircraft. However, if the LLC leases the aircraft to the company, then the company’s payments should be covered by the exception.

The FET exception will not apply to payments by a lessee that is leasing the aircraft from the management company under a lease with a term of thirty-one (31) days or less. This is intended to prevent the exception from applying to one-off customers of a charter company who structure their charters as wet leases. Such a wet lease structure may also be problematic from an FAA regulatory perspective.

The provision is effective for payments after the date of enactment, which could be as early as Dec. 22, 2017. While the provision will not be directly applicable to owner flights prior to this date, we understand that the IRS has recently been (correctly) interpreting current law to not impose FET on management fees with respect to owner flights and we would hope that this provision would reinforce that approach.

Acknowledgments

This article was written by NBAA Tax Committee members John B. Hoover, Cooley LLP, and Ruth Wimer, Winston & Strawn LLP, with thanks to Richard C. Farley, Jr., PwC, and Jeff Wieand, Boston Jet Search. Learn more about the NBAA Tax Committee.

by NBAA Tax Committee

2018-01-11T13:26:55+00:00 January 11th, 2018|Aircraft Tax, Aviation News, Blog, Economics of Aviation|

Tax Bill Wins Praise for Expensing, Managed Fee Stances

Negotiators on Capitol Hill agreed to retain two key provisions in the final version of the tax overhaul package: one that would extend immediate expensing measures to both used and new aircraft and another clarifying that the 7.5 percent air transportation tax does not apply aircraft management fees. The package could receive a final vote in the House and Senate this week.

The bill would allow for the write-off of the expenses for both used and new aircraft in one year. Past “bonus” depreciation measures have covered only new aircraft. Currently, businesses depreciate aircraft over a five-year period. The bill repeals like-kind exchanges for business property, but NBAA said it believes the immediate-expensing measure will offset that elimination. The immediate-expensing measure is set to expire in 2022, but has a phaseout period through 2026. “It is a priority for NBAA and will help provide the tools necessary to grow our economy,” said NBAA president and CEO Ed Bolen.

Meanwhile, the managed aircraft measure, meanwhile, will provide certainty on the tax treatment of the fees for the first time, bringing to an end an issue that that had been at the forefront for management businesses for years. The issue became particularly critical after a 2012 IRS Chief Counsel opinion left aircraft management firms vulnerable to back taxes and penalties. The IRS had audited a number of companies, assessing hefty taxes on the management fees. But after an outcry from industry, the IRS put the opinion on hold in May 2013 and stopped enforcing the audit findings surrounding the fees, pending clarification. However, the agency still has not issued a clarification.

“NATA is deeply appreciative that…conferees retained provisions in the tax bill that provide our member companies with long-sought certainty as to the tax status of aircraft management services and encourage investment in the new and used aircraft markets,” stated NATA president Martin Hiller.

NBAA noted that the legislation contains a number of other helpful provisions, including the reduction of the corporate tax rate from 35 percent to 21 percent, as well as a new 20 percent deduction for pass-through businesses. The association added it would work with a broad coalition to restore like-kind exchanges.

2017-12-18T13:41:38+00:00 December 18th, 2017|Aircraft Tax, Aviation News, Blog, Government Regulation|

NBAA Calls on Members To Contact Congress on Tax Bill

NBAA is encouraging its members to weigh in with their lawmakers on bonus depreciation, like-kind exchanges and business aircraft management fee measures as Capitol Hill negotiates a final comprehensive tax bill this week. The House and Senate versions of the tax bill address different aspects of these measures.

Both provide for 100 percent immediate expensing, or “bonus depreciation,” of business assets, but the House bill covers both new and used aircraft. The measures would apply to purchases through 2023, but the Senate has a phase-down that continues through 2027.

Like-kind exchanges for business assets would be repealed under both bills. Under like-kind exchange, taxable gains on the sale of a business asset can be deferred if that asset is exchanged for a similar asset. “The immediate expensing provision helps make up for the like-kind exchange repeal, but there is, of course, a sunset date for immediate expensing,” said Scott O’Brien, the senior director of government affairs for NBAA. “But the Senate language, which does not allow immediate expensing for preowned equipment, is a disincentive for the purchase of preowned business aircraft.”

NBAA also noted the Senate bill measure clarifies that business aircraft management service fees are not subject to the commercial airline ticket tax. The association created an electronic letter to help members contact Congress specifically on accelerated depreciation.

Read Expanded Version

By AINalerts

2017-12-13T10:23:49+00:00 December 13th, 2017|Aircraft Tax, Aviation News, Blog, Government Regulation|

IRS AUDITS AND RECORDKEEPING

The IRS audit process can be challenging for any business aircraft owner or operator, so NBAA has created resources to help Members prepare for audits and understand how the process functions. Developing a record-keeping system that maintains the information commonly requested by IRS auditors is one of the most important steps in preparing for a potential audit. In general, taxpayers have the burden of proving they are entitled to a specific tax deduction or credit, which makes having the necessary records for substantiation very important.

In NBAA’s Member resource, Record-Keeping Rules for Business Aircraft (300 KB, PDF), the history of IRS substantiation and record-keeping rules is reviewed, and specific best practices are provided regarding the types of records that an aircraft owner or operator should keep. For example, the resource provides details on how to substantiate the business purpose of a flight, which is a common audit topic.

NBAA also created a Navigational Guide for Audits (225 KB, PDF), which describes the IRS audit process from start to finish and includes details on appeal options for taxpayers. Starting with the initial contact by the auditor and moving through the information document request process to the audit findings, the guide provides business aircraft owners and operators with resources to manage IRS audits.

by NBAA

2017-10-26T10:28:20+00:00 October 26th, 2017|Aircraft Tax, Blog, Government Regulation|

CONTROLLING AIRCRAFT SALES TAX ON PURCHASES

One major cost in the purchase of any aircraft is the possible applicability of sales and use tax to the transaction. Because of the portability of an aircraft, it is generally easy to avoid sales tax on the purchase by closing in a jurisdiction with little or no tax, or an applicable exemption; but the use tax generally becomes an issue in the state in which the aircraft is based.

Although sales and use tax terms are not universally defined in all jurisdictions, for purposes of this discussion a sales tax is a privilege or license tax on persons engaged in the business of making retail sales by which ownership of tangible personal property is transferred for consideration. Use tax compliments sales tax and is a tax on the consumer for the privilege of storing, using, or consuming within the state any tangible personal property. The sales tax and use tax are generally mutually exclusive, and neither applies where the other was due and paid.

Because the aircraft is easily transportable, sales tax can be eliminated by transacting the transfer in a state such as New Hampshire or Montana which have no sales tax. Other states have little or no sales or use tax on aircraft purchases including: Massachusetts, South Carolina, and North Carolina. Finally, over a dozen remaining states have “fly-away exemptions” that provide an aircraft will not be subject to tax if it is immediately removed from the state and registered elsewhere. However these exemptions are narrowly construed, so a purchaser needs to exercise extreme care in determining the point of delivery and closing of the transaction.

Although the sales tax can generally be managed by movement of the aircraft, the use tax in the state of domicile of the aircraft is generally another matter. Use tax will generally be imposed by the state of domicile if sales tax would have been imposed had the transaction occurred within the state. Therefore, culminating the sale in a sales tax-free state is generally only the initial step in controlling sales and use taxes. It is therefore imperative that the purchaser find a use tax exemption which often includes the following:

Common Carrier Exemption. A common carrier exemption is not generally unique to aircraft, but often applies to transportation equipment used in the movement of persons and property for hire. Several states have a common carrier exemption that applies only to commercial airlines.

However, many states exempt charter operators operating under FAR Part 135 provided threshold use test are met. Under certain circumstances selected states will extend the common carrier exemption to aircraft operators serving members of their controlled group and operating under FAR Part 91.

Casual Sale. This exemption applies to the sale of aircraft by individuals or companies not regularly engaged in the aircraft sale business. A number of state laws which include a casual sale exemption specifically carve out aircraft from the exempt property designation, and therefore tax it.

Resale Exemption. Because the sales and use tax is a tax at retail, the purchase of the property will generally not be subject to tax if it is acquired in a wholesale transaction. This wholesale transaction exemption would apply when the aircraft is acquired for purposes of resale, and generally for lease. Therefore, when a dealer acquires an aircraft for the purpose of selling it to another, tax is imposed on the dealer sale, but not his purchase. Likewise, when property is acquired for lease to another, the acquisition of the property is generally exempt from sales tax, while the lease payments are then subject.

Interstate Exemption. Certain states recognize that if an aircraft is used primarily in interstate commerce, it is not subject to either sales or use taxes. The scope of this exemption generally turns on the level of interstate use, and the degree in which it resides in the state.

Trade-In Allowance. This is a partial exemption that results in an exclusion of a portion of the purchase price of the aircraft for the value of a trade-in. Generally, the sales tax trade-in allowance requires that the trade-in be a simultaneous two-party exchange. Although federal income tax rules provide for a non-simultaneous three-party exchange, generally these do not result in sales tax savings.

Entity Sale. Because the sales tax is generally imposed on the sale of tangible personal property, and the sale of stock or membership interest is an intangible, sales tax will generally not be imposed on entity purchases.

Corporate Transactions. In a number of states there are exemptions for bulk sales of property as part of an on-going trade or business, statutory mergers, dividends to shareholders, tax-free contributions of property to partnerships or corporations, and other similar transactions. It is often possible to structure transactions pursuant to these use-tax exemptions and thereby effectively limit the applicability of use tax.

The sales and use tax law is a tax on transactions where form is imperative. The states are generally very restrictive in the grant of exemptions, and strictly construe statutory requirements. Although, generally, states will provide credit for sales tax paid to another state that is not universally true. It is therefore possible for you to inadvertently subject your aircraft to sales or use tax in multiple jurisdictions.

Although the states are very precise in their requirements of form, a number of them have started to attack transactions asserting lack of substance. Although “form over substance” arguments are just emerging, some states are attacking lease transactions as “sham transactions” administratively. Although these issues will undoubtedly be ultimately decided by the courts, aircraft purchasers need to understand the respective position of the state tax department at the time of acquisition.

In an attempt to expand taxation on interstate transactions and provide basic uniformity in sales tax administration, 18 states have adopted the “Streamline Sales and Use Tax Agreement” effective October 1, 2005. Although this agreement provides uniform sourcing rules on leases, it does not require uniform use tax exemptions.

The sales and use tax law applicable to airplanes is exceedingly complex, and is often not uniformly clear. As the states’ tax appetites continue to grow, they appear to be increasingly aggressive even in areas previously thought to be exempt from tax. Purchasers are therefore cautioned to carefully plan their transaction, and if possible obtain a ruling from their state authorities.

Contributions to this article were made and edited by Louis M. Meiners, Jr., CPA

by GREG HARPER

2017-07-26T08:50:14+00:00 July 26th, 2017|Aircraft Tax, Blog, General Aviation|

IRS To Shelve Audits on Aircraft Management Fees


The IRS has decided to drop existing audits involving the assessment of commercial federal excise taxes (FET) on aircraft management activities, the National Air Transportation Association (NATA) said, lauding the move as a victory for aircraft management firms.
The IRS has audited numerous aircraft management companies, but previously agreed to suspend the assessments while it developed guidance on the tax treatment of aircraft management issues. “Recognizing that these tax audits have been ongoing for several years, often in a suspension status, the IRS confirmed to NATA that it is in the process of informing taxpayers that FET audits on the aircraft management fee issue will be closed in the interest of sound tax administration,” the association said.
“NATA appreciates the IRS’s recognition of the urgent need to provide tax relief to impacted companies. It is a significant step toward the ultimate resolution of the FET applicability issue,” said NATA president Martin Hiller.
A number of companies have already received the notification, NATA said, adding that others should receive written notification shortly. The association cautioned, though, that the notifications apply only to management fees, not other open audit matters. While the IRS is no longer pursuing past audits, the industry continues to work with Congress and the IRS on a permanent solution to the tax treatment of management fees.

by AINalerts: July 17, 2017

2017-07-26T08:32:20+00:00 July 26th, 2017|Aircraft Tax, Blog|

When Are IRS Commercial Transportation Taxes Due for Part 91 Flights?

Introduction

Many business aircraft operators make use of the limited options for cost reimbursement provided by the FAA under Part 91, Subpart F of the Federal Aviation Regulations (FARs). These options include timesharing, interchange or joint ownership agreements, affiliated group operations and demonstration flights. Typically, this section of Part 91 only applies to large (12,500 lbs or greater), turbine powered multi-engine airplanes, and fractional program aircraft. One exception is that aircraft, including piston airplanes, small airplanes, and all helicopters operated under the NBAA Small Aircraft Exemption can also make use of these cost reimbursement options.

Flights conducted under timesharing, interchange, or joint ownership agreements, and by affiliated groups all fall under Part 91 of the FARs, meaning that they are noncommercial for FAA purposes. The IRS is not bound by the FAA’s definition of a commercial or non-commercial flight and takes a different view of these operations. This means that even if a flight is conducted under Part 91 of the FARs, it may still be considered commercial by the IRS for Federal Excise Tax (FET) purposes.

When determining if a flight is commercial for FET purposes, the IRS first looks at whether or not any compensation changed hands in exchange for the flight. If the entity in possession, command, and control of the aircraft were to receive compensation for a particular flight, the IRS would most likely deem the operation to be commercial.

Timesharing Agreements 14 CFR §91.501(c)(1)

The amounts paid under a timesharing agreement are subject to the 7.5 percent FET. It is the responsibility of the time sharor (aircraft owner) to collect and remit FET on the amounts paid by the time sharee. The IRS considers the time sharor to have maintained possession, command, and control of the aircraft as both aircraft and crew are being provided to the time sharee in return for compensation.

Interchange Agreements 14 CFR §91.501(c)(2)

Under an interchange agreement, one aircraft is leased in exchange for equal time (a one hour for one hour barter) on another aircraft. The only compensation allowed by the FAA is a payment to make up for any difference that may exist between the cost of owning, operating, and maintaining each aircraft.

The IRS has deemed that interchange agreements constitute commercial transportation as one entity typically provides both aircraft and crew. With interchange agreements, the 7.5 percent FET is computed on the fair market value of the hourly flight time for each aircraft used in the interchange agreement even if no compensation changes hands. (NOTE: FET does not apply only to the amount paid for the interchange agreement.) It is the responsibility of the entity providing the aircraft and crew to collect and remit the FET for a particular flight.

Affiliated Group Operations 14 CFR §91.501(b)(5)

Under certain conditions, use of a business aircraft among affiliated companies may be permitted by the FAA. There must be a proper degree of affiliation between the entities, and the use of the aircraft must be “within the scope of, and incidental to, the business of the company.” If these conditions are met, the FAA allows for inter-company charges on a fully-allocated basis.

For IRS purposes, inter-company charges for affiliated group operations are exempt from FET only if the companies are connected by at least 80% voting stock ownership to a common parent. If this degree of affiliation does not exist, all inter-company charges could be subject to the 7.5 percent FET.

Joint Ownership 14 CFR §91.501(c)(3)

The FAA allows multiple parties to become registered joint owners of an aircraft. The joint owners share the fixed ownership costs associated with the aircraft and individually cover their own direct operating costs. Generally, amounts paid under joint ownership agreements are not subject to FET because each owner retains possession, command, and control of the aircraft for their individual flights. However, if it is found that one owner is retaining too much control over the aircraft, payments could be subject to FET.

Demonstration Flights 14 CFR §91.501(b)(3)

The amounts paid by a prospective purchaser to a seller for demonstration flights are subject to the 7.5 percent FET. If the seller receives payment from the prospective purchaser for the demonstration flight, taxable transportation has occurred. It is the responsibility of the seller to collect and remit the FET.

By NBAA

2017-06-13T02:14:17+00:00 February 23rd, 2017|Aircraft Tax, Blog|

Lawmakers Seek to End Aircraft Managed Fee Tax Issue

U.S. Rep. Pat Tiberi (R-Ohio) reintroduced legislation (H.R.896) yesterday clarifying that aircraft management services are not subject to federal excise taxes (FET). Senator Sherrod Brown (D-Ohio) is expected to introduce the Senate companion bill today, according to the National Air Transportation Association (NATA). The House Committee on Ways and Means approved similar legislation in July, though it didn’t advance beyond this stage.

The bills are in response to a March 2012 IRS Chief Counsel opinion that aircraft owners using aircraft management services who also allow the use of the airplane for occasional charter should have the 7.5 percent “ticket tax” assessed on aircraft management fees. In May 2013, the IRS put the opinion on hold pending further clarifying regulations. This status quo continues today.

NATA president Martin Hiller said this legislation is “so important to small aviation businesses vulnerable to potentially enormous IRS assessments.” He added that FET being imposed on management fees would amount to double-taxation on aircraft owners who seek to defray ownership costs by chartering out their aircraft.

The congressional Joint Tax Committee previously found that these FETs would contribute less than $500,000 to the government over the next 10 years. Such a finding—that a tax bill is essentially considered revenue neutral—is crucial to gaining support from both sides of the aisle to move the legislation.

 

by AINalerts 2/7/2017

2017-06-13T02:14:22+00:00 February 7th, 2017|Aircraft Tax, Blog|

Clarifying Federal Excise Tax Regulations

In addition to complying with FAA regulations, Part 135 and Part 91 operators conducting cost-reimbursable flights must understand how the federal excise tax (FET) on air transportation of passengers applies in various scenarios.

“FET questions are among the most frequent tax-related queries we receive from NBAA members,” said Scott O’Brien, the association’s senior manager for finance and tax policy. “That’s why the NBAA Tax Committee developed the Federal Excise Taxes Guide, which clearly explains FET rules, answers common questions and provides the most-current tax rates.”In addition to complying with FAA regulations, Part 135 and Part 91 operators conducting cost-reimbursable flights must understand how the federal excise tax (FET) on air transportation of passengers applies in various scenarios.

One of the common misconceptions in the industry is that FET never applies to Part 91 operations.

“A lot of folks don’t think Part 91 trips are taxable,” noted Mark Dennen, chief financial officer at Solairus Aviation in Petaluma, CA, and a member of NBAA’s Tax Committee. “But there are some circumstances where those trips are taxable.”

Federal Excise Tax Regulations

Nel Stubbs – an FET expert and co-founder and vice president of Conklin & de Decker – said, “The IRS is not bound by how the FAA defines a flight under the FARs. If compensation is being provided for a specific flight, the 7.5-percent FET on amounts paid and applicable segment fees are likely due. For Part 91 flights, FET applies to timeshare, interchange flights, carriage of elected officials, even demonstration flights.”

While most operators know that FET is usually due on Part 135 flights, there are some important exceptions.

“There are some exceptions, but they are very narrow,” explained Stubbs. “For instance, a small, non-turbojet-powered aircraft or helicopter weighing less than 6,000 pounds and not flying an established route is exempt from the FET and segment fees. Also, air tour operators using aircraft under 6,000 pounds are exempt, regardless of whether or not they fly on an established route, as long as their sole purpose is sightseeing. Helicopters are exempt when used in gas and mineral development. Helicopters and fixed-wing aircraft also are exempt when used in logging operations. Skydiving flights are exempt, too.”

Sometimes, such as when an aircraft operator works with charter brokers, there is uncertainty as to which party is responsible for collecting and remitting the FET to the IRS.

“Whoever is charging the end user for the flight is responsible for collecting and remitting the FET,” declared Stubbs. “As a best practice, operators should make sure that is stated on every invoice between you and the other company. It might seem like overkill, but in an IRS audit, that documentation is key to answering questions from auditors.”

Learn more at www.nbaa.org/federal.

August 22, 2016

2017-06-13T02:14:28+00:00 August 23rd, 2016|Aircraft Tax, Blog, FAA|

GAO Report Validates NBAA Position on Improper Diversion of Jet-A Taxes

Washington, DC, Aug. 10, 2016 – The National Business Aviation Association (NBAA) today said a new government report validates long-standing concerns expressed by NBAA and other groups about the validity of a so-called “fuel fraud” provision on aviation taxes.

The report, published this week by the U.S. Government Accountability Office (GAO), determined that as a result of the provision, between $1 billion and $2 billion has been improperly held back from the Airport and Airway Trust Fund over largely unfounded concerns about the use of aviation jet fuel in ground vehicles.

In place for more than 10 years, the provision automatically diverted a portion of excise taxes on turbine aircraft fuel to the Highway Trust Fund, based on the purported rationale that commercial truck operators might have been avoiding payment of taxes on diesel fuel by instead purchasing the turbine aircraft fuel for use in their vehicles.

The provision tasks aviation fuel vendors with voluntarily filing for credits on a per-transaction basis, which then correctly routes those funds for aviation-related uses. In comments to the GAO, NBAA and other stakeholders noted the credit process is unnecessarily burdensome, and offers little practical incentive for vendors to follow it.

Read the new GAO Report on the impact of the fuel fraud provision on aviation-infrastructure funding.

“After an extensive and unbiased investigative process, the GAO’s findings validate our belief that the current system is fundamentally flawed, and not structurally aligned with the intent of either the highway or aviation trust funds,” said NBAA Chief Operating Officer Steve Brown.

The report, which came about following a request for a GAO investigation on the issue by Rep. Mike Pompeo (R-4-KS), determined that any uses of aviation fuel in ground vehicles over the past decade have been “rare,” and that both “economic and technological disincentives” further restrict the likelihood of such diversions taking place today.

“We thank Congressman Pompeo for his request for a fair and equitable, third-party investigation on this issue,” Brown continued. “With the facts from this report now in hand, our hope is that Congress will correct this issue in a future transportation bill that properly routes all turbine fuel excise tax revenues to the aviation trust fund.”

 

by  Dan Hubbard, (202) 783-9360, dhubbard@nbaa.org

2017-06-13T02:14:29+00:00 August 15th, 2016|Aircraft Tax, Aviation News, Blog, Economics of Aviation, Government Regulation|