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.
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.
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.
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.
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.
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.