A business entity that operates an aircraft under the FAA’s Part 91 operating rules may choose to own the aircraft in a separate entity and dry lease the aircraft to the business entity. This structure is often used for sales/use tax planning. It is also used to meet the FAA’s requirement that a Part 91 operator must have “skin in the game”. In other words, a Part 91 operator cannot exist merely to own and operate an aircraft.
Passive Activity Rules: How to Keep Your Aircraft Losses Deductible
Under IRC §469, the IRS restricts the ability to deduct losses from activities that are considered “passive” — that is, businesses in which you don’t materially participate. Leasing personal property (such as an aircraft) is generally considered a passive activity. If the aircraft owner or operator contracts with a management company to provide day-to-day management of the aircraft for items like scheduling, maintenance, and providing pilots, the IRS may classify the rental of the aircraft as passive.
If your aircraft activity is classified as passive, the losses are suspended and not eligible for deduction until you have passive income or until the aircraft is sold. One commonly overlooked election is the “grouping” election. The grouping election allows a taxpayer to combine two or more business activities into one single activity for the purpose of determining whether the tax payer “materially participates.” If you own an aircraft in one entity and your operating business in another, grouping them together can help meet the material participation tests — which makes the aircraft non-passive and its losses deductible against active income.
Audit Defense and Preventive Structuring from Jetlaw’s Aviation Tax Attorneys
Jetlaw’s tax attorneys help clients defend against IRS audits by structuring leases and aircraft ownership correctly from the start.
Jetlaw is uniquely qualified to serve aircraft owners, operators, and flight departments — because it’s all we do. From structuring your acquisition to defending your audit, our team brings deep experience, aviation fluency, and personalized attention to every client relationship.
When you work with Jetlaw, you’re not guessing. You’re executing a plan backed by attorneys and CPAs who have the experience to ensure that your aircraft works for your business, not against it.