Specific questions do have specific answers, but specific answers depend on each individual's unique circumstances and goals for owning and flying an airplane. You should keep in mind some general rules of thumb while doing your taxes or consulting with your tax adviser. Because the tax rules are tricky, you would be wise to have a professional prepare your return so you can maximize your benefits.
Here we'll discuss aircraft ownership tax issues in general terms. Some pertinent and valid case law is available, but remember, these cases review unique circumstances that may, or may not be similar to your situation. In addition, you'll find it important to distinguish between business use of a personal aircraft, personal use of a business aircraft, and using the aircraft as a business itself. Some people who are concerned about liability protection may feel more comfortable if a business entity, such as a corporation, owns the aircraft, but in terms of tax breaks, the method of ownership generally makes no difference.
The first thing to remember is that buying an aircraft won't provide you an amazing deduction that results in your never again owing another cent in taxes. When owners total all the costs of ownership, including purchase, maintenance, hangar or tie down, upgrades, insurance, fuel, etc., most wish they could recoup some of their expenses in the form of a tax deduction. It only seems right, after all.
But if you look at Schedule A of Form 1040, other than line deductions for personal property or other taxes, gifts to charity, and unreimbursed employee expenses, you won't find any place to deduct the expenses related to simple aircraft ownership. Don't expect to deduct for state or local sales tax on Schedule A, either. Those taxes are specifically excluded from federal deductibility. Personal property taxes include such things as state or local automobile registration fees. Your CPA can tell you whether you can deduct any state or local fees for aircraft ownership.
A deduction for unreimbursed employee expenses may give an aircraft owner some tax benefit, but, again, everyone's situation is unique. If you take an inordinately large deduction, you risk an IRS audit and possible disallowance of the deduction. To deduct unreimbursed employee expenses, you must be the employee of a company, incur aircraft expenses on behalf of that company while performing duties for that company, and the expense must be reasonable, ordinary, and necessary.
In this area some favorable case law exists where the taxpayers demonstrated that using their personal aircraft for their employers' business increased their productivity and flexibility, helped save time, and allowed easy access to a travel destination otherwise not served by air carriers. Essentially, if you have a job that requires some travel, and you can demonstrate that using your personal aircraft helps save time and increases productivity, you can deduct aircraft expenses for that travel. This includes using rental aircraft.
If you're an owner, depreciation expenses may or may not be deductible. Generally speaking, owners can depreciate an aircraft if they use it in a trade or business, or to produce income. The issues surrounding depreciation are complex and beyond the scope of this article, but your tax adviser can tell you whether you can depreciate your aircraft. For the most part, occasional business use of a personal aircraft does not make you eligible to deduct depreciation expenses.
If you buy an aircraft to use in your own business, You have some additional things to think about. Again, depending on how you use the aircraft for business and pleasure, the rules can be complicated and are beyond the scope of this article. However, most related expenses, including depreciation, are deductible against the income of the business.
To further complicate matters, liability exposure causes many individuals to establish a separate company to hold title to the aircraft rather than own it personally, or they register it in the name of the main business. These issues can be confusing and involve unsettled and obscure tax rules and cases, as well as FAA opinions about applying Part 135, of all things, in some situations.
Quite innocently, their attorneys might advise aircraft buyers to "place the aircraft in a separate company" for liability protection, not realizing the traps they may stumble into. This area of the law shouldn't be so complicated, but, unfortunately, it's become a morass of confusing tax and aviation rules. Still, you can structure the arrangement - once again depending on individual circumstances - to provide the maximum tax benefit for the pilot-owner.
One safe bet for some solid deductions comes from using the aircraft as a business itself. You can buy (or rent, for that matter) an aircraft for the purpose of producing income. This opens a whole world of deductible items, taken on Form 1040, Schedule C, "Profit or Loss From a Business."
For example, a CFI can buy an airplane to provide flight instruction or a pilot can buy an airplane to lease to a club or flight school for rental, or to use for aerial photography, sightseeing, etc. When owners use their aircraft in income-producing activities, they can deduct the related expenses pursuant to Internal Revenue Code Section 162. Again, those expenses must be ordinary and necessary, as well as reasonable. In addition, the owner can depreciate the airplane. If an owner uses the aircraft for personal reasons occasionally, expenses related to that use generally would not be deductible, unless the owner could substantiate some connection with the overall business of the aircraft.
If the aircraft is used as a business, especially if it's leased to others for their use, owners must take care not to run afoul of the "hobby loss rules." Section 183 of the Internal Revenue Code, "Activities Not Engaged in for Profit," applies to individuals and S corporations, and disallows deductions attributable to those activities. The IRS doesn't offer a rock-solid definition of those activities, but the Code "presumes" that an activity is not for-profit if it generates no income for three or more of the past five years.
This presumption is not set in stone. Pursuant to a vast amount of case law, all that's required is the taxpayer's honest intent to show a profit. An owner demonstrates that intent if he keeps business-like records, consults with tax advisers, relies on their advice, spends time on the business, and occasionally shows some income for the activity. In other words, if the aircraft business looks and acts like a business, it doesn't have to show a profit. Because depreciating an aircraft usually generates the largest loss on paper, generating a profit sometimes is all but impossible. The IRS realizes this and - most times - allows full deductions.
If owners fly their aircraft for charitable purposes, they will be able to deduct the fair market value of those services. That includes actual fuel costs, and perhaps an amount based on the estimated per-hour cost of the aircraft. Owners should document this amount in detail so they can substantiate it during an audit.
I have been fairly aggressive in advising pilots who hold commercial certificates to also deduct the fair market value of their services as a pilot, and I haven't had any trouble with the IRS about this particular issue. Generally, auditors don't seem inclined to disallow such a deduction if it's reasonable, based on the overall return. But some tax commentators feel that such services don't constitute a valid deduction. As a rule of thumb, such a deduction for services should not exceed $250 per year.
When it comes to tax tips for aircraft owners, you can say only one thing with certainty - every situation is different. The smartest thing an owner can do is invest in a CPA and have their tax return professionally prepared. The best bet is to find a CPA who knows something about airplanes - or actually owns an aircraft. You can bet that CPA knows every trick in the book. And by the way, you can deduct the cost of the CPA's fees.
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