Tax Planning for Aircraft Owners By Daniel Cheung, CPA Aviation Tax Consultants, LLC Columbus, Indiana Arizona Aircraft Expo Scottsdale, Arizona October 23, 2015

Income Tax Planning Sales / Use Tax Planning FAA Regulations Compliance Outside CPA for the aircraft ATC offers:

Business Owner Self Employed Individual Aircraft Leasing - Flight School / Flying Club / Charter Companies (Air Taxi) Key - Business Justification Who Can Write Off an Aircraft?

Ideal fact situations: A doctor owns a medical practice in an S corporation, 100% shareholder Visit multiple offices and hospitals to see patients, attend medical seminars A business aircraft is justified to facilitate business travels Medical practice revenues will justify a business aircraft Who Can Write Off an Aircraft?

The aircraft is a business tool in a profitable business We do not want to start an aircraft business, we have a profitable medical, engineering, consulting business, utilizing a business aircraft It takes significant revenues to justify an aircraft – starting from scratch is extremely difficult

Income Tax Benefits: Depreciation Operating Expenses become deductible Deferral of federal and state income taxes

MACRS – Modified Accelerated Cost Recovery System, 5 year depreciable live Section 179 Expensing, $500,000 in 2014 Bonus Depreciation, 50% in ? What is depreciation?

Depreciation Schedule – 5 year life Half-year convention Half-year deduction in years 1 & 6 Purchase by Sept % depreciation in first two tax years 71% depreciation in first three tax years Year % Year % Year % Year % Year % Year 65.76% Traditional MACRS Depreciation Schedule: Purchase by September 30th

Mid Quarter Convention 4th quarter purchase (October 1, 2015) Applies when 40% of assets are purchased in 4 th quarter Less first year MACRS depreciation (5%) Especially important for used aircraft No proration for bonus and Sec 179 in 4th quarter (if renewed) Carefully manage business vs personal use

Depreciation Schedule – 5 year life Mid-quarter convention Purchase after Sept. 30 and over 40% of all assets acquired 43% depreciation in first two tax years 66% depreciation in first three tax years Year 15.00% Year % Year % Year % Year % Year 69.60% Purchase after September 30th:

Part 91 UseDepreciation Expense Tax Savings (45% tax rate) Year %200,00090,000 Year %320,000144,000 Year %192,00086,400 Year %115,20051,840 Year %115,20051,840 Year 65.76%57,60025,920 Example: Purchase of aircraft at $1,000,000 before September 30:

Part 91 UseDepreciation Expense Tax Savings (45% tax rate) Year 15.00%50,00022,500 Year %380,000171,000 Year %228,000102,600 Year %137,00061,650 Year %109,00049,050 Year 69.60%96,00043,200 Example: Purchase of aircraft at $1,000,000, after September 30:

Section 179 Expensing - $500,000 for new or used aircraft  Phase out begins at $2,000,000  Dollar for dollar reduction above $2,000,000  Complete phased out - $2,500,000  Taxable income requirement  2015?

50% Bonus depreciation  Applies only to new aircraft  Dealer inventory or demonstrator applies  No cap on purchase price  2015?

General Income Tax Issues Trade In Credit Like-kind Exchange – Section 1031  Avoid recapture of depreciation on sale of current plane  Recapture is taxed as ordinary income Related Party Rental  Limitation on utilizing accelerated depreciation Personal Use  Proration based on seat hour / mile calculation

Partnership / multiple buyers  One LLC with multiple members Business use determination One partnership tax return filed  Multiple LLC’s co-owning one aircraft More beneficial and flexible for income tax purpose Each partner operates his own plane Each partner reports his own plane based on his business and personal usage

Sales and Use Tax FAQ: Can I set up a Delaware / Montana LLC to buy the plane and not pay sales tax? Answer: Yes, sales tax is not due to Delaware / Montana, but you can bring the plane home to Arizona and pay use tax.

Sales and Use Tax enforcement FAA registration information is forwarded to the state department of revenue Airport hangar audit, listing of tail numbers Aircraft registration

Deferral of Sales and Use Tax Exemptions are available California – Interstate Commerce Arizona – Rental & Leasing Exemption, Occasional Sale Exemption Planning is critical to claim any exemption

Arizona – Rental & Leasing Exemption  Purchase of the plane tax exempt  Sales tax to be paid on monthly rental revenues  Fair market value rental rate – monthly or hourly  Deferral of sales tax

Arizona – Casual Sale Exemption  “Garage sale” exemption  Purchase between individuals  What if LLC is involved?  What if seller is a leasing company?  Be very careful claiming this exemption

An initial interview to discuss some general background information, how the aircraft will be used, etc. Review income tax returns Formulate the initial plan Discuss the plan with client and advisors (CPA, Attorney, spouse, etc.) Implement the plan: entity setup, documentation creation, sales tax compliance, etc. Continual, ongoing monitoring during the three-year engagement period. What is the engagement process?

Contact information Office Daniel Cheung (cell) Fred McCarter (cell)