Owning an airplane is a gratifying experience in many ways. One of those ways is using your aircraft for business purposes. Being able to get to work locations directly without having to drive great distances, avoiding crowded airline terminals, and being able to set your own schedule for departure are all perks of owning your own aircraft. However, taking deductions for the associated aircraft expenses is not just a perk, it’s something that you are entitled to do. I’m here to encourage you to do just that.
Sadly, some airplane owners are reluctant to report the expenses associated with the business use of their aircraft on their tax returns. Some tax preparers and business advisors are also perpetuators of this fear of aircraft deductions. Fear of a tax audit makes up one part of the problem, but the fear of not knowing what can be deducted is even more common.
Fear of the audit
Statistically, the chances of getting audited are not high, but that’s of little comfort when you receive a notice from the IRS stating they would like to have a chat about your tax return. Receiving an IRS notice in the mail is anxiety inducing, so let me just state the obvious: Dealing with the IRS scares people, even if you are only being questioned about $3 of bank interest that you forgot to report. It also leads to the question of, “what else are they going to find to pick on me for?” This can spiral into a big, black ball of anxiety until you call your tax preparer and say, “here, take care of this notice, will you?” While this may reduce your anxiety level for the moment, it does increase the blood pressure of the person on the receiving end. I know. I get those anxious calls, and, no, I don’t like your tax notices either.
Having been through many audits for aircraft deductions or other purposes, I can say this: People who have prepared their tax returns with good documentation and rationales for their deductions can make it through an audit (mostly) unscathed. The audits that require intense defense efforts are those where no clear documentation for the business use of the aircraft exists and record keeping is minimal.
Documentation and record keeping starts when the aircraft is purchased or first used for a business purpose. It doesn’t end until either the aircraft is sold or it is no longer being used in the business. It’s very much like flying; the flying part doesn’t stop until you’ve landed and plane is in the hangar.
There is no shortcut to determining the best ownership structure for an aircraft used in a business. Sometimes, there are conflicting goals between taking deductions, paying sales tax, or paying income tax; those issues need to be identified and resolved before the accounting for flights, expenses, and business use begins. There are good resources in the aviation sector, such as professionals and literature, that can help you in this area to save yourself and/or your business advisor the trouble of having to reinvent the wheel. You only need to be an expert in your business and that doesn’t have to include the airplane deduction business unless you want it to.
Plan the flight, fly the plan
I ran across a U.S. tax court case today where a taxpayer – a lifelong lover of aviation, an airline pilot, and an Air National Guardsman – took deductions for an airplane purchased for the stated purpose of aerial photography and flight training. The deductions included depreciation and supplies such as a headset and a portable GPS (all pretty standard stuff). But the taxpayer forgot one thing: there was no income yet. Granted, these expenses were incurred near the end of a tax year and there wasn’t much opportunity to earn any money in the last months of the year, but this is where the IRS tends to get picky.
If you haven’t turned the key and actually started a business, it’s not a business. You can show them all of your business plans, hopes, and dreams, but, like the saying goes, “a goal is just a dream with a deadline.” You are still operating within the constraints of a dream if you don’t have some of the results of those goals to show for your work. This is not to say you have to be profitable, but as this case illustrates, you have to be earning something. So, step number one is to have an operational business that you can use your airplane in.
Fear of the unknown
Most business professionals and tax advisors have a comfort zone where they feel they can render advice confidently. Aviation is one of those areas that many professionals know, or have heard, where there are special rules. That’s enough to tell them to tread lightly when confronted with aviation questions. For example, the area of income tax has many areas of specialized knowledge. Aviation tax is no different, having special interrelationships with other regulatory agencies such as the FAA and DOT.
Let’s start from the premise that you have a business and can use your aircraft for to support your work. Let’s also suppose that when you aren’t using your airplane, you want to have others use it in some kind of charter or timeshare arrangement so the airplane keeps busy and you get the benefit of some cash inflow. Additionally, you’d like to use your aircraft for going on vacation and checking on your other business endeavors, like rental properties. If you took the word “airplane” out of the preceding sentences and inserted “car” and presented this to a tax professional, they would know how to allocate the car expenses to the categories of income. Categorizing airplane expenses is really no different.
Step two is tracking and documenting your flights. For our example, you will need to track the various uses of the aircraft. By being diligent and keeping track of your trips – which pilots already do – and documenting the reason for the flight, you’ve overcome one of the biggest hurdles to expensing aircraft costs: documentation. At the end of a year, you have to be able to account for all use of the airplane whether it is business, lease, charter, timeshare, or personal use. Your aircraft-related expenses can then be allocated amongst the various types of use by hours, ownership costs, operating costs, and depreciation.
Once you (or your tax professional) have made the allocations, you can then assess what will be deductible and where on a tax return the deductible amounts appear. In our example, if the business owner reported their business expenses on a schedule C as part of a form 1040, the aircraft expenses related to the business use would be included on the schedule C. The business use can be related to your active business as well as in support of your other business ventures, such as rental properties.
The income and expenses related to the leasing, chartering, or timesharing will appear on a separate schedule C, but will be categorized as passive income or loss. A whole other article can be written on this topic, but to summarize the issue, you won’t be able to currently deduct these expenses until you have passive income to absorb the expenses or until you sell the aircraft. The final consideration is the expenses related to your personal use. These expenses are not going to appear on the tax return since personal travel expenses are not deductible.
Now, that wasn’t so complicated, was it?
The complexity comes when the ownership of a business aircraft is within a company and there is leasing between entities for the use of the aircraft; when company employees, guests, or others are using the aircraft for a mix of business and personal purposes; or there are timeshare flights where federal excise tax needs to be collected. It’s really no different than what I described above, except that it involves more detailed tracking of flights, passengers, and the purpose of their flights.
Don’t let fear of an audit stop you or your tax professional from deducting legitimate use of your aircraft in support of your business. Just do your homework and let the experts do theirs for you.