Angel Houck

Business use of aircraft is often deductible, but the flights must be well documented to maintain these deductions. In addition to keeping your logs and tracking the passenger flight details, the IRS requires that all business use of aircraft be documented contemporaneously and in writing.

So, what does this mean and how do you meet these requirements? 

Written and Current Information

First, the information needs to be contemporaneous, or gathered at the time of the flight. Although there are opportunities to go back and obtain additional information, such as affidavits and statements, they will focus on what was available at the time of the flight.   

Second, this information needs to be in writing. With today’s technology, this is much easier, but the idea that everything is business no longer flies with the IRS (pun intended).

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Four Ways to Document Business Flights

There are several ways to adequately document your flights, below are four common practices:

• Emails. Send an email before the flight discussing the upcoming meeting, then follow up and discuss the results afterward.
  
  
• Agendas. Draft meeting agendas before the meeting and keep meeting minutes. Consider circulating in the emails above.
  
  
• Calendars. Create a calendar invitation and include the location and attendees.
  
  
• Photography and Promotion. Social media posts, videos, pictures and other media can both help and hurt you. If you post about attending a concert or a game, but mark the flight as business, the IRS may be able to find this information and argue otherwise.
  
  

Detailed Trip Sheets

Another best practice that I recommend is to keep “trip sheets” for each flight on the aircraft. This can be a one-page document completed by someone with knowledge of the flight details. Include the passenger list, purpose of the flight and other information useful for an audit. I recommend that these be signed and dated to show they were timely created.

Although it’s important to document your business flights, you don’t want it to be burdensome. The best information-gathering process will vary from owner to owner. 

Be sure to talk to your tax advisor and include your team in the process. That way, everyone can understand their role and help make all of the necessary information available.

So you took delivery of an aircraft in a fly-away state. You’re in the clear, right? Not necessarily. Aircraft are mobile property and can be taxed in multiple jurisdictions. States are becoming more savvy and are starting to enforce compliance.

With increased reporting and information sharing between agencies, we’re seeing a huge influx in state and local audits looking for non-compliance and lost revenue related to aircraft. 

There are two main state and local taxes that need to be considered. First, we have sales and use tax which is imposed on the purchase of the aircraft, usually enforced by the state. Second is property tax, which is an annual tax imposed on the value of the aircraft, usually enforced by individual counties.  

State Sales Tax Considerations

Sales tax is imposed when a transaction takes place in a state and use tax applies when an aircraft is brought into the state after the transaction. Many deliveries take place in a tax-friendly state to help manage the initial sales tax obligation. But use tax usually applies once the aircraft arrives at its home airport. 

Many states have options to defer the tax, or even full exemptions, but there are procedures that must be followed and requirements to be met. Therefore, the plan needs to be in place before the aircraft arrives in the state.

State Property Taxes 

Property tax is assessed annually for many states and each jurisdiction has its own set of rules for filing. It’s important to know if you have a property tax obligation and how to file. Keep in mind, it’s the taxpayer’s responsibility to comply. So you’re not off the hook if the state doesn’t contact you.  

Some states, such as Missouri and Texas, will only allow discounted rates and apportionment for timely filed returns. That means late filed returns can be very costly.  

Final Thoughts

As it relates to state taxes, the situation becomes even more complicated for aircraft owners who spend significant time in multiple states. There are many opportunities to manage state and local tax obligations. That is, if you plan early and ask the right questions. Understanding potential liabilities in advance can prevent unexpected tax bills down the road.

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Our firm has been seeing an increase in multi-owner aircraft structures over the past few years. This means you share aircraft ownership, which is a great way to cut down on overhead and reduce your overall costs of ownership. 

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However, what many owners do not realize is that the tax treatment of these arrangements depends heavily on how the aircraft is titled and structured.  

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There are two primary ways that multiple owners can own an aircraft. First, and usually the default, is to put the aircraft in an LLC and have each owner own a piece of the LLC.   

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The second, often more favorable option, is co-ownership, where each owner holds a registered, undivided interest in the aircraft. With proper planning, both structures can comply with FAA regulations, but their tax implications differ significantly.

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If the owners will be the primary users of the aircraft, the co-ownership structure is almost always the better option. With the co-ownership, it’s possible for the owners to elect out of partnership treatment and treat their “piece” of the aircraft as a single aircraft for tax purposes. This means that each owner can handle their tax planning independently of the others. In many cases, this is the only option to allow deductions for bonus depreciation.    

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In the multi-member LLC structure, we run into two major hurdles. First, the related-party leasing rules under IRC Sec 280F disqualify many related party leases from being eligible for bonus depreciation. If the owners or their related businesses are the primary users of the aircraft, bonus depreciation will likely not be an option. 

Second, the LLC operates as an aircraft rental company, so it generates passive losses that can only offset passive income, not active business income. Even if the aircraft is eligible for bonus depreciation, most taxpayers cannot use the passive losses in the current year.   

If you're buying an aircraft with multiple owners, be sure to consult with your aviation tax and legal advisors. They’ll be able to explore the two ownership structures and choose the option that best meets your financial interests. 

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As year-end approaches, now’s the time to review your 2024 aircraft records. In doing so, you’ll ensure proper tax reporting of your aircraft activity.

The rules for deducting aircraft expenses are very specific and require detailed records and documentation. But this can be easily managed with the right planning and processes.

In late 2013, the IRS released the final regulations that govern how company provided business aircraft expenses can be deducted. Non-entertainment use of your aircraft is potentially deductible if the use is properly substantiated. 

Taxpayers are required to track the usage on a flight-by-flight, passenger-by-passenger basis. This means you must look at the primary purpose of each flight, but also the primary purpose of each passenger onboard. Having family and personal guests onboard business flights will likely impact the deductibility.

In addition, the IRS requires written, contemporaneous records to substantiate deductible aircraft use. Records can include emails, meeting minutes, agendas, calendar invites, social media posts, checklists, and pictures.

This documentation can be in the form of emails, meeting minutes, agendas, calendar invites, social media posts, check lists, pictures, etc. The information should be enough for an auditor to connect the dots and understand the purpose of your trip.

Every aircraft owner is different, and best practices can vary from owner to owner. It’s important to implement a process that works for your organization to ensure that the required information is being maintained without becoming overly cumbersome. 

The IRS has tightened up their audit processes for business aircraft. The good news is that we’re seeing a streamlined approach on recent audits. Now is the perfect time to review your records and get ready for tax season!

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The Presidential election results are in. Now we can predict how a second Trump term will impact aircraft taxes.

Looking back at 2024, the general environment has been anti-aircraft owner. For example, earlier this year, the President released a statement to “crack down” on corporate jet loopholes and eliminate tax breaks for corporate jet users. This followed the IRS announcement of their plan to conduct focused audits on business aircraft use. A group of senators (all still in office) also wrote a letter pressuring the Treasury to reevaluate the Standard Industry Fare Level (SIFL) rates, calling them “outlandish.” Biden and Harris’s tax plans included a provision to extend the depreciable life of aircraft to 7 and 12 years.

Since February, the IRS has increased its level of audits on aircraft taxes. The SIFL issue is still out there, but the argument that the lower rate provides tax loopholes is misunderstood.  It remains to be seen whether this matter will gain any traction.

In the near term, the key question people are eagerly awaiting is whether 100% bonus depreciation will return. Trump has presented several tax policy ideas. Yet there are a few things consistent across the board with 100% bonus depreciation being one of them. There’s also talk that the change may even be made retroactively, meaning 2024 purchases would qualify.

If I had to use my crystal ball, I think it’s likely that 100% bonus depreciation will return in the near future. As for other changes to aircraft taxes, I expect we’ll see a major tax package come through in 2025, but the contents are yet unknown. 

My wish list this Christmas? Allowing the excess business loss limitations to expire and bringing back like-kind exchanges. Both are unlikely, but a girl can dream.

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As we approach the end of the year, we continue to receive a lot of questions on aircraft bonus depreciation. With the current law, many aircraft will qualify for up to 60% bonus depreciation in 2023, and some will even qualify for 80%. As with most tax law, there are conditions that must be met, and the intricacies cannot be overlooked. To avoid unexpected surprises at tax time, it is important to address the rules before you close.

To qualify for bonus depreciation, the aircraft must be predominantly used in Qualified Business Use (“QBU”). Aircraft that will be predominantly for personal use often will not qualify. QBU has a stricter definition than business use. It has special carve-outs for related party leases and use by “greater than five percent” owners. The ownership and operating structure must be carefully analyzed to determine if the requirements can be met.

The usage of the aircraft is the primary driver for eligibility, and is based on your tax year. Each year, the aircraft usage must be carefully monitored and analyzed to ensure that the QBU requirements are met. If the QBU requirements are not met in a later year, you may have to “give back” the bonus depreciation. That means taking a lesser depreciation deduction, referred to as recapture.

Keep in mind that any deductions, including depreciation, will be limited by personal use of the aircraft. This includes not only personal flights, but also personal guests onboard business flights. We recommend careful planning of your flight itineraries through year end to ensure that the deduction is maximized, especially in the year of purchase.

Bonus depreciation is scheduled to reduce by 20% each year, so 40% in 2025, 20% in 2026, and down to 0% in 2027. However, with the election coming up, and a long-time pending bill to bring back 100% bonus sitting with the senate, the rules could change in the future. If you are looking to purchase an aircraft and bonus depreciation is an incentive, be sure to address the requirements prior to purchase to make sure your tax planning goals are met.

About the Author

Angel Houck is a CPA and the co-founder of Houck & Christensen CPAs, LLC, a firm that focuses exclusively on business aviation. Angel advises many tax matters that impact aircraft owners and operators, including federal income tax, state and local taxes, federal excise tax, US source income, and audit support. Angel is on the NBAA Tax Committee, Treasurer of the Central Florida Business Aviation Association and a member of IADA.