Embed Size (px)
Citation preview
Tax Planning forAircraft Owners
By Daniel Cheung, CPAAviation Tax Consultants, LLC
Columbus, Indiana
Arizona Aircraft Expo
Scottsdale, Arizona
November 14, 2014
Income Tax Planning Sales / Use Tax Planning FAA Regulations Compliance Outside CPA for the aircraft
ATC offers:
Business Owner Self Employed Individual Aircraft Leasing - Flight School / Flying
Club / Charter Companies (Air Taxi) Key - Business Justification
Who Can Write Off an Aircraft?
Ideal fact situations: A doctor owns a medical practice in an S
corporation, 100% shareholder Visit multiple offices and hospitals to see patients,
attend medical seminars A business aircraft is justified to facilitate business
travels Medical practice revenues will justify a business
aircraft
Who Can Write Off an Aircraft?
The aircraft is a business tool in a profitable business
We do not want to start an aircraft business, we have a profitable medical, engineering, consulting business, utilizing a business aircraft
It takes significant revenues to justify an aircraft – starting from scratch is extremely difficult
Income Tax Benefits: Depreciation Operating Expenses become deductible Deferral of federal and state income taxes
MACRS – Modified Accelerated Cost Recovery System, 5 year depreciable live
Section 179 Expensing, $500,000 in 2013
Bonus Depreciation, 50% in 2013 2014 / 2015???
What is depreciation?
Depreciation Schedule – 5 year life
Half-year convention Half-year deduction in years 1
& 6 Purchase by Sept. 30 52% depreciation in first two
tax years 71% depreciation in first three
tax years
Year 1 20.00%
Year 2 32.00%
Year 3 19.20%
Year 4 11.52%
Year 5 11.52%
Year 6 5.76%
Traditional MACRS Depreciation Schedule: Purchase by September 30th
Mid Quarter Convention 4th quarter purchase (October 1, 2014) Applies when 40% of assets are purchased in
4th quarter Less first year MACRS depreciation (5%) Especially important for used aircraft No proration for bonus and Sec 179 in 4th
quarter (if renewed) Carefully manage business vs personal use
Depreciation Schedule – 5 year life
Mid-quarter convention Purchase after Sept. 30 and
over 40% of all assets acquired
43% depreciation in first two tax years
66% depreciation in first three tax years
Year 1 5.00%
Year 2 38.00%
Year 3 22.80%
Year 4 13.70%
Year 5 10.90%
Year 6 9.60%
Purchase after September 30th:
Part 91 Use Depreciation Expense
Tax Savings (45% tax rate)
Year 1 20.00% 200,000 90,000
Year 2 32.00% 320,000 144,000
Year 3 19.20% 192,000 86,400
Year 4 11.52% 115,200 51,840
Year 5 11.52% 115,200 51,840
Year 6 5.76% 57,600 25,920
Example: Purchase of aircraft at $1,000,000 before September 30:
Part 91 Use Depreciation Expense
Tax Savings (45% tax rate)
Year 1 5.00% 50,000 22,500
Year 2 38.00% 380,000 171,000
Year 3 22.80% 228,000 102,600
Year 4 13.70% 137,000 61,650
Year 5 10.90% 109,000 49,050
Year 6 9.60% 96,000 43,200
Example: Purchase of aircraft at $1,000,000, after September 30:
Section 179 Expensing - $500,000 for new or used aircraftPhase out begins at $2,000,000Dollar for dollar reduction above $2,000,000Complete phased out - $2,500,000Valid for 2013 purchase of new or used
aircraft
General Income Tax Issues
Trade In Like-kind Exchange – Section 1031
Avoid recapture of depreciation on sale of current plane
Recapture is taxed as ordinary income Related Party Rental
Limitation on utilizing accelerated depreciation Personal Use
Proration based on seat hour / mile calculation
Partnership / multiple buyersOne LLC with multiple members
Business use determination One partnership tax return filed
Multiple LLC’s co-owning one aircraft More work initially More beneficial for income tax purpose
Sales and Use Tax
FAQ: Can I set up a Delaware / Montana LLC to buy the plane and not pay sales tax?
Answer: Yes, sales tax is not due to Delaware / Montana, but you can bring the plane home to Arizona and pay use tax.
Sales and Use Tax enforcement FAA registration information is forwarded
to the state department of revenue Airport hangar audit, listing of tail numbers Aircraft registration
Deferral of Sales and Use Tax Exemptions are available California – Interstate Commerce Arizona – Rental & Leasing Exemption,
Occasional Sale Exemption Planning is critical to claim any exemption
Is Bonus Depreciation Still Available?
Status for bonus depreciation in 2014:
On 7/11/2014, the House of Representatives passed HR.4718 that amends the IRC to modify and make permanent 50% bonus depreciationSenate’s version of the bill is a 2-year extensionWhite House says the President will veto a permanent extension billThere will be negotiation, likely after the November electionWill the final bill be retroactive?Will there be a bill?
John 07/16/14 3:58 PMDaniel, this is John at Cessna. Do you think Congress and Obama will pass and sign the
extension of Bonus Depreciation? I have heard favorable reports lately. Thanks.
Me 07/16/14 4:04 PMIt passed the House, making bonus
permanent, but Democrats in Senate and POTUS will not agree to it. Bill in Senate says 2 year extension but no date has
been set for a vote...it may not happen till after November elections.
John 07/16/14 4:08 PMOk. I had hoped it was closer to passage. Thanks for the quick
response. Me 07/16/14 4:09 PMNo problem. If you are on LinkedIn I
post regular Foxnews-style reporting...
John 07/16/14 4:09 PMAre your legs as good as Megan
Kelly?
Me 07/16/14 4:11 PMWell, people comment about
my calf regularly...
John 07/16/14 4:12 PMGood to know.
Me 07/16/14 4:15 PMMore info than you need to know...John 07/16/14 4:17 PM
I'll keep your secret....
Is Bonus Depreciation Still Available?
An initial interview to discuss some general background information, how the aircraft will be used, etc.
Review income tax returns Formulate the initial plan Discuss the plan with client and advisors (CPA, Attorney,
spouse, etc.) Implement the plan: entity setup, documentation creation,
sales tax compliance, etc. Continual, ongoing monitoring during the three-year
engagement period.
What is the engagement process?
Contact information www.aviationtaxconsultants.com Office 800-342-9589 Daniel Cheung 317-716-3388 (cell) [email protected] Fred McCarter 812-371-5322 (cell) [email protected]
