I responded to a thread entitled “Taking tax depreciation” I can see that there is a lot of confusion out there re this subject matter. So I have pasted below my comments from that thread in the hope that it will clear up some of the confusion.
Here’s my comments from that thread:
As I have read this thread on using your airplane for business, allow me to contribute to the fray.
I am a CPA in Santa Rosa California. I practice aviation tax law for several of my clients. I just sold my Cherokee 6 that I used in business for 12 years and bought an SR22. Here is how I handle the business usage of the airplane.
I have created an LLC which will own the 22. There is no requirement for the SIFL (Standard Industry Fare Level) as Dave has suggested, provided the plane is the only asset in the LLC (more about SIFL in a minute). If the aircraft is the sole asset in the LLC (which it is for me), all funds put into the LLC by either myself or the other two members will be considered capital contributions. Each member will provide me with their business usage and personal usage based on flight hours.
The business usage percentage will be applied to the various expenses in order to prepare the K-1s to which the business expenses will flow out to the partners. One thing to keep in mind, do not elect Section 179 for the airplane in an LLC being operated like mine. Section 179 deductions (i.e., write off of the first $100,000 in the year of purchase) can only be offset against income. In my LLC, there will be no income, only capital contributions. Therefore, the 179 deduction would forever be stuck inside the LLC. This would be a drag to get yourself into.
Re the SIFL, this personal use charge is only applicable for employer-provided aircraft (Rev Rule 2004-36). Therefore, if the aircraft is used in a company business, which has numerous asses including the aircraft, then the SIFL is applicable. Otherwise, it is not applicable.
I have also noticed some other threads in which the person said that they will not claim the depreciation but only their out of pocket expenses. Not claiming depreciation can also get you into trouble under the concept of “allowed or allowable”. This means that if you are entitled to depreciate the aircraft, and don’t do so because you felt it could create more problems for you, the IRS under audit could recompute your tax return as if you did take depreciation. This would be disastrous in a situation in which the stature of limitations have run for the year the aircraft was placed in service but the year under audit is the year you sold or disposed of the aircraft.
In other words, you never got the benefit of the depreciation deduction but now you have to recapture the amount that you should have taken in the year of sale or disposition. This would be the ultimate in phantom income. Be careful in this area. It could come back to haunt you.
To summarize, business usage of your airplane is a great way to go. Using an LLC is a great way to gain some legal protection. The tax law surrounding the LLC is fairly straight forward if you set it up right. If you have your company purchase the airplane, then you are subject to SIFL. If you put the airplane into its own LLC by itself, then no SIFL is needed.
I hope this if helpful to all of you aircraft owners.
Happy flying.