Advocate
Consulting President Louis Meiners, Jr. sat down with ANN recently at
AirVenture 2007, to discuss common misconceptions about taxes in the aviation
industry, and offered some tips to reduce the tax burden on individuals as well
as corporations. Meiners is a CPA and attorney as well as a 4000 hour pilot. He
has been consulting with aviation-specific risks for several years.
Most
pilots are concerned with the write-off process for business-use aircraft.
Meiners says if aircraft is used for business more than fifty percent of the
time, and this time is properly documented, businesses "get to write off
their airplane." If the airplane is used for business purposes less than
fifty percent of the time, the tax benefits are not as substantial, as the
aircraft is considered a "hobby" expense. Meiners says typically
aircraft can be written off over a period of five years, and depreciation
factors into this deduction.
For
aircraft owners operating their planes for pleasure, Meiners says "in some
cases it's possible for them to write off the part of the airplane that's
personal." The aircraft could be considered listed property for a
deduction in certain instances, though special documents would be required.
Typically,
contemporaneous laws require documents explaining where and when the aircraft
was used, the purpose of each aircraft trip, and the interests of those on
board.
Aircraft
owners using their planes for an occasional trip to a second home, for
instance, want to ask themselves what the primary purpose of the trip is. While
the laws are intended to offer tax breaks only for true business purposes,
Meiners says there is "no statutory requirement that you can't have
fun." Family trips are not so simple, as justifying a true business outing
may be difficult.
The
IRS has special examination procedures for aircraft owners, Meiners explained.
A business plan detailing the business use of the aircraft is highly
recommended in case the Feds come knocking. "Other than that," says
Meiners, "an airplane is no different than any other business tool."
"There
are often opportunities to control if you owe sales tax on an airplane."
explains Meiners. The key is how you buy the aircraft. If an LLC is sold and an
airplane is an asset of the LLC, the tax aspects of the sale are much different
than if the airplane was sold as an object. If an airplane is bought in a state
with no tax, and brought back to a state that would have had a tax, a use tax
is typically due. A use tax is a compensatory tax that is intended to mirror
sales tax. Usually it is much easier to control a use tax, as some states have
significant exemptions on these taxes. Meiners says the states that have
exemptions still send out a request for the tax due, even if the airplane could
be bought tax-free.
As
many ANN readers are aware, Maine has been trying to tax pilots flying their
aircraft into the state for extended periods of time. To help avoid this issue,
Meiners recommends suppressing your N number. It is "too easy for states
to arbitrarily send out notices to people." explains Meiners. The NBAA
designed the Block Aircraft Registration Request (BARR) program, which prevents
your airplane from being identified by flight tracking software. This increases
your privacy and makes it harder for states to stick taxes on aircraft that are
not based there.
A
common misconception, according to Meiners, is that Delaware corporations
provide an adequate tax shield. Meiners actually recommends Nevada
corporations, as Nevada has secrecy laws that make it difficult for other
states to track aircraft and find out who the airplane owner is.
Tax
exemptions have long been a mystery to aviators. The mission of Advocate
Consulting and similar firms is to simplify the complex tax deduction process
specific to aviation. Aviators and business owners should consider consulting
with a CPA and attorney experienced in the aviation realm, as they are likely
to shield some of your money from Uncle Sam.
After
all, taxation with representation isn't so great either.