When buying a private aircraft, you must keep in mind that there are always taxes involved in any purchase.
The Tax Cuts and Jobs Act of 2017 changed private aircraft purchases and ownership by eliminating tax-free exchanges under Internal Revenue Code § 1031, which modifies the depreciation rules applicable to aircraft and limits the deductibility of business entertainment and commuting expenses.
To maximize federal income tax benefits, you should develop an ownership plan with a professional tax advisor who can guide you through the potential pitfalls of private aircraft ownership.
Usually, aircraft is owned and operated by the business of the buyer, therefore, the operating costs are incidental to the company’s business and deductible under Section 162 of the Internal Revenue Code as ordinary and necessary expenses paid or incurred in carrying on a trade or business.
A well-structured purchase plan allows a taxpayer to save or even avoid state sales and use taxes since often aircraft sales are not subject to sales tax as long as the buyer accepts delivery of the aircraft in a tax-friendly jurisdiction. Also, the buyer may accept delivery in a state that exempts aircraft from sales tax altogether.
The Tax Cuts and Jobs Act of 2017 modified Code § 1031 to only allow like-kind exchanges of real property. Under the Act, the full cost of an aircraft used in a trade or business may be depreciated during the first year of ownership. These new rules apply to purchases of either new or pre-owned aircraft acquired and placed in service after September 27, 2017, but before January 1, 2023. If the aircraft does not qualify for bonus depreciation, its purchase cost will be depreciated using the straight-line method.
Owners must also be aware of how often the aircraft is used for personal, non-business uses, including entertainment and commuting. The Tax Cuts and Jobs Act of 2017 modified Code § 274 so that entertainment expenses are no longer deductible. This new rule applies to aviation-related expenses regardless of whether the expenses are directly related to a taxpayer’s trade or business.
The Tax Cuts and Jobs Act of 2017 also modified the deductibility of expenses incurred in providing transportation between an employee’s residence and place of employment, unless the transportation-related expenses are incurred primarily for the employee’s safety.
As noted above, there is an exception for travel that is “necessary for ensuring the safety of the employee.”
It is vital that before purchasing an aircraft, you carefully consider the variety of issues the purchase entails. You should enlist the help of a competent professional to establish the foundation for the transaction by selecting the proper acquisition structure and to ensure the purchase meets your needs.