Answers for Pilots

Tax time

February 1, 2000

Preparing for April 15

As April 15 starts to sneak up on us — yet again — many newspaper and magazine articles will begin with the phrase "It's that time of year...."

Tax time. The most dreaded of all government-imposed red-letter days. To some pilots it also feels like a day to have their pockets picked and, according to Rodney Martz, an AOPA aviation technical specialist, members often call the AOPA Pilot Information Center asking for advice at tax time. "'What constitutes using my aircraft for business so that I can take advantage of deductions?' is a common question this time of year," says Martz. "Basically, any use of an airplane that you own or rent that relates directly to your income can be considered for a deduction."

For example, if an aircraft owner uses his airplane to fly to inspect his or her investments in another area or travels in his or her airplane for business, the owner can deduct expenses incurred. "When used in a formal business, the tax law allows deductions for all business-related expenses and ownership expenses, including depreciation," says Martz. "A simple way to make this calculation is to track every dollar spent on the airplane in a given year, track every flight hour as to whether it is business-related or a personal flight, and simply multiply the percentage of the total flight hours that are business by the total dollars spent."

Adding an instrument rating can count as a business expense if your basic business use otherwise qualifies, adds Martz. "The only exceptions to the 'all expenses' calculation are the recent IRS rulings that engine overhauls and avionics upgrades must be capitalized as separate five-year depreciable items."

The timing of the aircraft's placement in service during the year does not matter for just one aircraft (standard depreciation is based on a special formula over six years). An owner can use the same 20-percent depreciation deduction in year one whether the aircraft is purchased on January 1 or December 31. Placing multiple aircraft in service during the same year may cause a different depreciation amount, notes Martz.

"We're not accountants or tax attorneys here at the AOPA Pilot Information Center," continues Martz. "But we can help you with the basics of business use as well as the taxes that accompany your purchase." (As always, consult a tax expert where warranted.) A call to the AOPA Pilot Information Center gives you the opportunity to ask an AOPA aviation specialist for advice as well as receive information concerning taxes. The Pilots' Guide to Taxes: Income, Personal Property, Sales, and Use was prepared by aviation attorney and CPA Ray Speciale and includes information on income tax and deductions, and court decisions involving pilots and their specific tax concerns.

Also included is information on the sales and use tax — another way in which aircraft owners can feel taken by the taxman. "If you've recently purchased or are considering purchasing an airplane, be aware that your state's sales tax or use tax applies just as with any other purchase," says Martz. "Forty-five of the 50 states have a sales tax, and the states solicit information on aircraft sales from the FAA."

The tax applied varies from state to state and may be figured on the full sale price of the aircraft or on the trade-in amount. A use tax may be applied if you purchase your aircraft in one state, but plan to base it in another. The following exemptions may apply: Some states offer exemptions for what is termed a "casual" sale between individuals, not dealers; if the aircraft will be used in interstate commerce, it may be exempted from the sales or use tax; or if a corporation does business in several different states, it could be exempt.

"A common question that we hear concerns so-called 'Delaware corporations,' in those states — there are five including Delaware — that do not charge sales tax," says Martz. "Even though you may have purchased your aircraft in a state that doesn't charge sales tax, the state where you plan to base your aircraft can and will charge a use tax. The state will know where your aircraft is based from audits that it regularly conducts. Some states have significantly less tax; others, such as Indiana, will charge its own state use tax even though you may have already paid a sales tax in another state."

As an AOPA member, you have access to the best resource anywhere for information and answers for pilots. The AOPA toll-free Pilot Information Center gives you direct access to specialists in every area of aviation. The center, 800/USA-AOPA (800/872-2672), is available to members from 8:30 a.m. to 6 p.m. Eastern time, Monday through Friday. All of the information mentioned is also available on AOPA Online (www.aopa.org) .