State and federal tax planning plays an integral role in every aircraft sale and acquisition. From sales tax to federal excise tax, careful planning and structuring before closing may successfully eliminate or defer tax due on the ownership or operation of the aircraft.
1. Sales and Use Tax: Most states levy sales tax when title to an aircraft transfers while the aircraft is located in that state. Without an exemption, tax is assessed at closing. Sales tax can be avoided when a state provides a “flyaway” exemption.
Transaction Tip: Save time, money and simplify an aircraft closing by selecting a pre-purchase inspection facility located in a state with a flyaway exemption.
Even if sales tax is avoided in the delivery state, use tax is generally due in the state where the aircraft resides or is heavily used. Careful use tax structuring can eliminate or defer use tax payments over the period of the aircraft ownership.
2. Property and Aircraft Registration Fees: States typically assess a registration fee or property tax on aircraft ownership. Annual registration fees may be calculated on the aircraft’s year of manufacture and the maximum gross weight. Property tax is assessed on a percentage of the market value of the aircraft. The taxable rates vary by county.
1. Depreciation Issues: The purchase price of an aircraft may be deducted over time through depreciation deductions. When an owner uses the aircraft primarily for business, the cost of the aircraft is deducted over the applicable depreciation recovery period. Aircraft owners may also benefit from bonus depreciation rules which allow a large percentage of the aircraft’s cost to be depreciated in the first year of ownership. Tax planning can help avoid triggering hobby loss rules which disallow depreciation deductions.
2. Passive Activity Rules: Many aircraft owners purchase their aircraft through sole purpose entities. Sole purpose entities are generally prohibited from operating aircraft under the Federal Aviation Regulations, so aircraft expenses easily qualify as passive activity losses. Without passive activity income, aircraft expense deductions are suspended. Careful structuring may prevent loss suspension, resulting in greater tax benefits to the aircraft operator.
3. Bonus Depreciation and Immediate Expensing: The 2017 Tax Cuts Act increased aircraft bonus depreciation to 100% in certain situations. Your business aircraft may qualify for 100% expensing during its first year of business use if the aircraft was acquired after September 27, 2017 and placed in service before January 1, 2023. The Tax Cuts Act repealed IRC Section 1031 Like Kind Exchanges for for personal property, and that section no longer applies to business aircraft.