A corporate jet is a tool that can be instrumental to the growth of a company and the efficiency of its executives. Organizing the purchase of business aircraft involves the application of corporate law, tax law and applicable federal aviation regulations, among others.
Here are several fundamental issues to consider before purchasing business aircraft.
* Sales tax. The sales tax in Florida on a jet with a purchase price of $20 million could be $1.2 million. Even if you take delivery in a state with little or no sales tax, if the jet will be based in a state with sales tax, you will typically owe use tax. A properly structured transaction can result in the deferral of the sales tax.
* The right entity. To be eligible to operate a corporate jet to carry people or property under the general aviation rules of the FAA (Part 91), aircraft must be operated incidental to the primary business of the operator. So-called single purpose entities fail to satisfy that test. There is, however, no prohibition on a single purpose entity owning an aircraft, as long as it does not operate it. Operators can alleviate some of their liability concerns with an appropriate level of aviation insurance.
* Affordability. Many corporate operators acquire aircraft expecting to be able to charge others for flying as a way to supplement the cost. Except in very limited circumstances, aircraft operators under Part 91 are not permitted to accept compensation in exchange for providing transportation.
Some corporate operators, therefore, enter into arrangements with an authorized charter operator that is permitted to charge third parties for transportation. Generally, if you take into account the management fees and the charter operator’s percentage of the charter revenue, this type of operation may not necessarily generate positive cash flow.
* Income taxes. A corporate jet purchase may only make financial sense if the owner can benefit from the associated depreciation deductions. Under certain circumstances, purchasers of new aircraft are entitled to take accelerated depreciation (bonus depreciation). Many buyers rush to purchase new aircraft with bonus depreciation fever. Being entitled to the deduction is one thing; actually being able to take advantage of it is quite another. It is important that the buyer consult with an accountant to confirm that the tax benefits can be utilized.
* Personal usage. In light of the limitations on receiving compensation in exchange for providing transportation, an operator is not permitted to accept reimbursement from an executive for personal usage of corporate aircraft. However, as a perquisite, the value of the trip must be imputed as compensation to the executive using valuation rules set by the IRS.
Under recent amendments to the Internal Revenue Code, a company may only deduct the expenses associated with a personal use flight by certain specified executives in an amount equal to the value imputed to the executive’s income, which may be significantly less than the expense incurred by the company. The effect of personal usage should be included in any computation of the tax benefit of aircraft purchase.
* Aviation insurance. The importance of securing hull and liability insurance from an aviation underwriter through a reputable and knowledgeable aviation insurance broker cannot be emphasized enough. Aviation insurance brokers can be an invaluable source of information during the buying process. Liability insurance should be for as much as you can afford, regardless of the operating structure selected.
The purchase of aircraft should be viewed as seriously as the purchase of a business, because the purchase and operation involve not only the initial price but continuous regulatory compliance, income and sales tax issues and disclosure requirements (for public companies), to name a few.
Corporate operators should try to stay connected to the business aviation area through organizations such as the National Business Aviation Association.
Stewart H. Lapayowker is a shareholder in the Fort Lauderdale office of Akerman Senterfitt. Lapayowker assists foreign and domestic clients with a variety of private aircraft matters. Reach him at (954) 468-2461 or [email protected].