When a financed aircraft is owned in a special-purpose company, which lacks assets other than the aircraft, it is typical and understandable for the financing bank to insist that, in order to extend this special-purpose company a loan to purchase the aircraft, that loan must be guarantied by another, more solvent person or company. In fact, banks will often seek multiple, overlapping guaranties—for example, from both spouses a couple, or from an individual and another company owned by that individual.
A notable milestone in the cat-and-mouse game of individuals seeking to minimize tax burden and Congress making new laws to end potential shelter activity is the Passive Activity Rule, which was originally enacted as part of the Tax Reform Act of 1986, and which recent developments have brought prominently to the minds of tax advisors. In particular, an important one-time opportunity to avoid being trapped under this rule arises from new IRS regulations issued in November 2013 due to the new net-investment income tax passed as part of the 2010 Patient Protection and Affordable Care Act (a/k/a “Obamacare”).
Tax Depreciation of General Aviation Aircraft
Businesses throughout the country routinely make use of general aviation aircraft to provide travel and communication efficiencies that provide them with an important competitive advantage. As part of a general Congressional approach to encourage business investments, the Tax Code allows a rapid depreciation schedule for aircraft that allows owners to fully write-off purchase/acquisition costs over a period of time (usually five year) that is far less than the economic life of an aircraft.
In September 2013, the Department of Treasury released long-expected final regulations governing what expenditures can be deducted as repairs in the year incurred, versus what must be depreciated over multiple years. These new regulations, which are effective starting in 2014, and will govern this area of law for the foreseeable future, span several hundred pages in length. As a result, this article provides only a basic introduction, and leaves out numerous special rules and exceptions.
Deducting Aircraft Expenses? Detailed Tax Calculations Now Mandatory
New IRS regulations effective in 2013 and forward require taxpayers claiming deductions for aircraft to undertake detailed calculations to determine what fraction of total expenses may be rendered non-deductible due to personal entertainment use of the plane. These calculations are necessary not only for aircraft owners, but also for lessees and charter customers; they apply to any company seeking deduction of expenses for use or ownership of business aircraft.