The Most Frequently Asked Questions About Corporate Aviation and the 2017 Tax Cuts & Jobs Act
Most everyone in the business aviation industry has heard that the 2017 Tax Cuts and Jobs Act (the “Act”) permits a 100% write off of the purchase price of new and used aircraft in the year of their purchase. However, many people do not realize that this provision of the Act is subject to a myriad of “gotchas” that may limit or completely eliminate this 100% write off opportunity.
Following is a description of several of the significant "gotchas" that could limit or eliminate the new tax benefits, including the 100% purchase price write off, that business aircraft owners need to consider:
Listed Property Rules: The “listed property rules” may cause a business aircraft purchase to be ineligible for accelerated depreciation, including 100% depreciation, in the year of purchase or a subsequent year. If you, as a business aircraft owner, want to take the 100% write off in the year you purchase your aircraft, you must have at least 50% “Qualified Business Use” of that aircraft in the year you purchase it and in all years that you own it.
Although, in many cases, the Qualified Business Use requirement is clearly met, there is an important “trap” to be aware of that could unexpectedly lead to the application of these rules to prevent you from taking the 100% write off. This “trap” is referred to in the business aviation industry as the “leasing company trap.”
A typical illustration of the application of the leasing company trap involves a principal who owns his or her business through multiple “brother-sister” LLCs, S corporations, partnerships, etc. One of these brother-sister entities owns the aircraft, and leases it to another brother-sister entity that uses the aircraft primarily to transport the principal owner of both entities. We also see this issue arise when a CEO wants to own the aircraft himself or herself and lease it to his or her operating business – this structure may be necessary due to having minority shareholders, or other growth/stock value issues.
The use of this structure leads to the failure of the “Qualified Business Use” requirement. Although this is clearly a “form over substance” problem, this type of improper structuring of business aircraft ownership and operations can lead to loss of accelerated depreciation deductions including the 100% write off.
Passive Loss Limitation Rules: Renting or leasing your aircraft may lead to the inability to utilize the 100% write off in the year of an aircraft purchase because rental and leasing activity is, by definition, a “passive” activity. Therefore, if you lease your business aircraft to another person, the 100% write off could be characterized as a passive loss. For example, placing your aircraft on a charter company’s certificate for use in charter is a leasing activity (regardless of the title of the agreement between the aircraft owner and the charter company). Aircraft related losses are therefore characterized as passive and may be deducted only against passive income. Without passive income, deduction of the passive loss is deferred until passive income exists or the aircraft is sold, which defeats the goal of generating a 100% deduction in the year the aircraft is purchased.
Loss of Investment Expense Deductions: Under the Act, an individual is no longer permitted to deduct expenses he or she incurs in connection with managing his or her investments. A typical fact pattern involves an individual who manages his or her investments through a family office entity that is not clearly conducting an active trade or business. Alternatively, the management entity may be the general partner of a partnership that includes other investors. Typically, the family office or management entity does not earn material management fee income, if any. The company typically uses the aircraft to allow its principal owner to visit and conduct on site management of investments, and to conduct due diligence on other prospective investments.
Although the company uses the aircraft in connection with activities that will appreciate in value and generate income, under the Act, in general, use of the aircraft in such activities will no longer be tax deductible. Instead, an individual must be engaged in a “for profit” trade or business activity, for which the use of the aircraft is “ordinary, necessary and reasonable" to avoid this new limitation.
Loss of Unreimbursed Employee Business Expenses: Under the Act, expenses related to an aircraft owned by an individual (or in a wholly owned disregarded entity) and used in connection with a business in which the individual is an employee, are no longer deductible by the individual in excess of the amount that the individual is reimbursed. Excess aircraft related expense deductions, consisting mainly of depreciation and, perhaps, some unreimbursed fixed costs are therefore lost.
Limitation on Excess Business Losses and NOL’s: Under the Act, business losses (meaning, essentially, trade or business losses in excess of trade or business income) of more than $500,000, for a married taxpayer filing a joint return, and $250,000 for a single filer, must be carried forward as a Net Operating Loss (NOL) to the next succeeding tax year. In the succeeding tax year, the NOL deduction is limited to 80% of the taxpayer’s income, computed without regard to the NOL. The Act creates other potential “gotchas” related to these two new loss limitation rules.
New Entertainment and Commuting Disallowance Provisions: The Act created new provisions disallowing deductions of aircraft depreciation and operating expenses as they relate to business entertainment and commuting. Business entertainment generally consists of travel on a business aircraft to a destination, where the aircraft passenger’s primary purpose at the destination is to engage in an entertainment activity with clients, customers, vendors, etc. However, since the Act did not change the definition of entertainment, which continues, in general, to reference activities such as golfing, attending sporting events, hunting and fishing, and engaging in recreational activities at a country club or hotel/resort type location, the taxpayer continues to control the threshold determination and classification of whether the activity is primarily entertainment related.
The Act also did not define “commuting” and, therefore, the taxpayer continues to control the threshold determination and classification of an activity as being primarily related to commuting. Therefore, planning opportunities exist to ensure that an activity is not treated as primarily entertainment related or primarily related to commuting. It is nonetheless necessary to analyze the specific facts, including a discussion regarding the overall travel schedule of the executive being transported on board the business aircraft, to determine whether or not it is possible to avoid such a characterization.
Clearly, the tax rules applying to aircraft are complex. Aircraft marketing that states that the purchase of an aircraft will create an immediate 100% write off is a teaser that needs to be carefully examined, with proper planning and implementation of an aircraft ownership and operating structure that will enable you to avoid the pitfalls described above.
GKG Law attorneys are able and available to assist with this process to help you achieve your goals and avoid these gotchas. Please contact us to discuss further by contacting:
- Keith Swirsky, kswirsky@gkglaw.com or 202.342.5251
- Troy Rolf, trolf@gkglaw.com or 763.682.6620
Previous GKG Law insight and information on the TCJA and tax changes affecting business aviation can be read in Troy Rolf's legislation alert found here.
