Could someone familiar and well versed on the tax depreciation rules/benefits contact me at firstname.lastname@example.org. I’ve been in contact with Advocate Tax consulting and a local CPA familiar with the structuring of airplane partnerships, etc., but I need a better idea of how things work. It seems they are somewhat vague until you start paying for their services. I don’t mind doing that once the partnership is ready to be put in place, but right now, I’m just trying to get some answers and ideas.
Generally, if your plane is used in a trade or business, one with a real profit motive, not some incorporated hobby, you can depreciate the plane. If the plane is ever used for personal flights, you must recognize and pay tax on an amount of income equal to an amount determined under the SIFL regs (ie, Standard Industry Fare Levels, in the tax regulations)…generally, equal to the cost of a first class ticket for EACH passenger. Even if you are flying on business, but carrying a passenger for pleasure, the passenger must report income equal to a first class ticket. If you are flying a Gulfstream and only transporting your girlfriend, the SIFL income chargebacks are quite reasonable compared to the available writeoff. If you are flying a plane that cost a few hundred thousand, you could really screw yourself under the SIFL regs. I am a tax lawyer and own two airplanes and do not bother with depreciation or SIFL on either.
Cross-posted (in part) from another thread:
I was encouraged by Cirrus (and others) to play the depreciation/tax-avoidance game. I have ownership interest in 3 Gold’s Gyms, all in S FL (Pembroke Pines, Hollywood and Coral Gables). It would have been nice to have one of the “S” Corps buy the plane and take advantage of the depreciation. My accountant (who often is slightly more “aggressive” than I am) discouraged me from going that route, since the VAST majority of hours flown would have been non-business. In fact, in the first 100 hrs of ownership, about 2.5 have been business related. He said his firm had been involved with one similar situation and it turned into a rat’s nest of extra paperwork, and possibly difficult to justify in case of an audit.
Flying has always been expensive, but with low-rate home re-financing and about 1/3 down (from the sale of my Tiger and some airplane-earmarked savings), my monthly payments on my (demo) SR22 are less than I used to pay on my home mortgage (paid off in 1999 - yay!) and less than some pay for luxury/exotic car leases.
Digging in and paying almost $20k for FL sales tax was not fun, but my tax return is (relatively) simple and I sleep well at night.
For those of you who know me, you know I own 2 Emu’s (they came with the house.) I came across this article recently and in light of the conversation on the thread, I thought I would pass it along.
BTW. If you are wondering what an emu is, here ya go:
How to deduct an emu: America’s funniest tax stories
By Jay MacDonald
Did you hear the one about the emu? The sperm donor? The dog food? They’re just three of the more ingenious tax deductions that creative Americans have devised over the years to counterpunch the tax collector. A quick Ali shuffle, a feign with the left and an outlandish deduction delivered with a straight face can take the sting out of the annual tax beating – at least until the Internal Revenue Service catches on.
Taxes, of course, are no laughing matter. Serious consequences await those who fail to file, falsely file, knowingly underreport or otherwise throw spitballs at the system. Just ask Willie Nelson, who lost the best little golf course in Texas to back taxes.
Still, every year Americans try to shave what they owe on their personal income tax returns by pushing the envelope and letting their certified public accountant make the line calls.
“If you’re going to be aggressive, deductions are where you’re going to do it. You’re not going to do it in the area of income; you want to report all your income,” says Frank Howard, CPA and principal of Howard and Waltrip in Dallas. “I go ahead and apply the smell test. Most of the time, they’re just throwing everything up against the wall to see if it sticks.”
Old argument invalidated.
As any accountant will tell you, the rewards of cheating on your taxes are never worth the risk. And even if you find a tax pro willing to push the limits, the Treasury Department says this year the old “my tax adviser said it was OK” argument will no longer work.
“Too many tax advisers have counseled clients against disclosing their transactions with the expectation that the advisers’ opinions will allow the clients to avoid penalties,” stated Treasury Assistant Secretary for Tax Policy Pam Olson in announcing the rule change. By removing that argument, tax officials now believe taxpayers’ risk-to-reward calculations will be more judicious, eliminating what Olson describes as “inappropriate tax avoidance transactions.”
Still, it’s a good bet that as April 15 approaches, many taxpayers will do – or at least try – the darndest things. Here are nine of the funniest, though not recommended, tax-trimming attempts that clients have taken to CPAs across the country.
My son, my dog
Disc jockeys typically don’t make much money and save even less. A few years ago, one approached Wyoming CPA Mike Lovelett for some free advice. “I’ve got this problem, and I’m really starting to get nervous about it,” the DJ admitted. “Several years ago, I was going to owe some tax, so I put an extra deduction on my tax return.”
Well, Lovelett reasoned, it couldn’t be that bad. Then the DJ explained: “I put my dog on as a dependent.” The radio personality had deducted his dog Red all these years, a move that meant he owed nothing to the IRS. When Lovelett advised him to contact the IRS and make things right, the DJ admitted, “I barely have money for my next meal. What should I do?”
Lovelett, managing director of Lovelett, Skogen & Assoc. of Casper, Wyo., replied, “Well, this year when you file your tax return, mark Red as deceased and pray nobody ever wants to talk to you about him.”
Sex and the city
Then there was the client who approached Manhattan CPA Marc Albaum about a very personal tax matter. “He had made some money being a sperm donor and wanted to know if he could take a depletion allowance,” Albaum recalls. “I told him he really needed to be an oil well or something like that.”
Playing with fire
Herb Wakeford, a CPA in Raleigh, N.C., recalls a Pittsburgh furniture-store owner who, after years of trying unsuccessfully to sell his business, hired an arsonist to torch the place. The insurance company paid off to the tune of $500,000, which the owner dutifully reported on his income tax return. However, along with taking the proper deductions for the building, its contents and the usual business expenses, he also deducted a $10,000 “consulting fee” he had paid the arsonist. An IRS audit two years later landed them both in jail. The IRS disallowed the “consulting fee” and slapped on $6,500 in additional taxes, penalties and interest.
What, not the Barcalounger?
Then there was the client who insisted on deducting the cost of his television and cable service against his accountant’s advice. “His reasoning was that he was a Spanish teacher at school, and the only reason he bought the TV and had the cable was for the Spanish channels so he could be able to teach his students better,” Howard recalls. “I told him, well now, not too many people out there can deduct the cost of their TV and cable, but if you can get away with it, knock yourself out.”
Fun with livestock, part I
Back when the Society of Louisiana CPAs manned a tax hotline, few inquiries stumped them. But Al Suffrin, SLCPA’s communications and public relations director, recalls one that did: “We took a call from an ostrich farmer in St. Tammany Parish who called in to find out how to go about depreciating an emu,” he recalls. Strange as it sounds, you can depreciate an emu or any other livestock, as long as they’re used for breeding.
Fun with livestock, part II
Which brings us to the tale of the crusty old Texas rancher who insisted upon accompanying his CPA, Raymond Lott of Lott, Vernon & Company of Killeen, to the rancher’s first tax audit. When the rancher’s tax depreciation schedule listed 15 or 20 animals as breeding stock, the no-nonsense young IRS agent challenged the old cowboy. “I presume you breed these animals?” she asked pointedly. Without hesitation, the rancher replied, “Nope,” sending his CPA into mild tachycardia. After a sufficient pause, the rancher finished the popular Texas joke, “I’ve got a bull for that.”
There was a time when deductions were as plentiful as dinner mints. “Many years ago when I was a young clerk, a local CPA kept a very large glass bowl filled with receipts in his office,” recalls Nancy Reynolds of Reynolds & Associates in Naples, Fla. “If a client came in and was a little shy of deductions, they merely dipped into the bowl and helped themselves to some of those glorious deductions.”
Sic him, Fido
Sometimes deductions seem so logical they just have to be legal.
“I had a guy come in one time wanting to know if he could deduct the cost of his dog food. His reasoning was that his dog was security for his house, therefore the dog food became a security expense,” Howard says.
“I kind of liked that one. The IRS loves that stuff.”
He works in mysterious ways
And when all other loopholes seem closed, sometimes only a higher power can help.
One fine February, a rookie tax accountant completed a slam-dunk return for one of the firm’s old and trusted clients and turned it in to his boss, relates Mary Anne Petesch, a CPA with Hagen Kurth Perman and Co. of Seattle. There followed several loud whoops of laughter from the partner’s office.
It seems the client had accidentally lost his dentures when they fell in the toilet, and had claimed them on his taxes as an act-of-God casualty loss.
P.S. This really wasn’t off topic but I didn’t know what section this would be best placed.
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 Â“allowed or allowableÂ”. This means that if you are entitled to depreciate the aircraft, and donÂ’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.
You make reference to the IRS using a “first class ticket” as a comparable value to a general aviation aircraft. But how does the IRS account for the reality that GA flys to approx 6000 airports where a 1st class ticket is not available.
Is it better to:
- deduct the value of a 1st class ticket & limo to your destination
- Use .95 cents per mile
- Depreciate the aircraft too
- Not depreciate the aircraft
- Use some formula to deduct actual operating expenses.
P.S. Why is a money donation to Angel Flight deductable when donation of an applicable value of our aircraft and our time, is not.
Confused and forlorned
I am pleased to read what you have stated. I am a little surprised that so many bright Cirrus owners really think that they can play some of the tax games that they play. And these tax consulting outfits who claim they can assist to dodge taxes are ripping them off and leading them down a blind alley. The idea that you can dodge the sales taxes by keeping the plane out of state for 90 days, or that the typical LLC arrangement being used is going to succeed on audit, is unfortunately quite erroneous. Wish it were so, but it isn’t. There’s a little problem with the concept of “intent.” Kudos for giving it to people straight.
The amount of income that must be recognized for personal use of a business aircraft is determined under the Standard Industry Fare Level regulations, published by the IRS. I referred to a first class ticket just to give one an idea of what to expect under the SIFL rates. The actual value is not necessarily a first class ticket. However, it may take into account the fact that a ticket from Washington DC to Podunk Arkansas can easily exceed the price from DC to San Francisco, since Podunk is not a heavily traveled route…hence the comparison to first class rates.
I’m not sure I understand all your enumerated questions, eg “deduct a first class ticket?” My reference to ticket prices is the amount you must add to your tax return for the mere privilege of flying your aircraft for personal use. It is no deduction, but an income item. That’s the cost for choosing to depreciate the aircraft. If you don’t want the income…don’t take the depreciation deduction!
I believe your refer to mileage for this purpose: With a car, I can “depreciate” only so much portion of the car as I use for business. I do this through a business mileage deduction, or if the car is used 100% for business, I can elect a straight depreciation deduction based on what I paid for the car and ignore mileage. If I use the mileage deduction, then I am not depreciating my car when I drive it for personal use, since I don’t take a mileage deduction for that use. Consequently, I don’t have to recognize the “income” associated with the personal use, as with the SIFL rates. I do not believe this alternative is available for an airplane. As far as I know, the only choice you have is to depreciate the full cost of the plane. The fact that the plane may not be used 100% for business is accounted for by adding back an amount to income whenever it is used for personal purposes (ie, via the SIFL rates). It may be possible to deduct direct expenses for business use, eg, gas, landing fees and so on, without taking any depreciation and thereby avoid the SIFL regulations. Honestly folks, I haven’t researched this aspect very much, so if there’s someone who knows more than I on this issue, speak up.
For a truly costly airplane, the depreciation deductions will far exceed any SIFL income, so it pays to depreciate, even if it is used mostly for personal travel. For our size airplanes, however, it ain’t such a clear benefit. The SIFL income could kill you.
Further, I see several used Cirrus for sale already…imagine if the poor seller had taken the 50% bonus depreciation last year on a plane costing $240,000…he took a deduction for perhaps $120,000 in first year. Then he sells the plane for $215,000. He’s now got to report a $95,000 profit as ordinary income, when he actually lost $25,000 on the plane. Just remember, much of what you save in taxes from depreciation, is likely to come back and bite you when you sell…so set those savings aside.
Regarding charity: now, if one could deduct one’s “time”, none of us would owe taxes, right? Any money I make is directly proportional to my time spent earning it! Keep in mind the principle that you cannot deduct more than what you pay for something (purchased with after tax dollars). If you have been taxed on efforts expended on your on time (eg, earned a salary), then there is no tax basis or tax cost to serve to justify a deduction. Tax first, deduct later.
You might be able to deduct the direct cost of a charity flight (gas)…this is not really my area of expertise, but I doubt you can deduct the cost associated with the time on the aircraft(eg, akin to a depreciation deduction). There is tax basis in the aircraft, so there would be logic to permitting this. I suspect it is disallowed, however, for practical and administrative reasons. Imagine every person deducting the drive to church each week.
Don’t most people set up an LLC to own the airplane and then just ‘rent’ it from the LLC at current market value and let the LLC file it’s own tax return?
Very interesting stuff Dave. Thanks. It’s interesting to hear your point of view, especially when the sales guys are yelling from the top of every mountain about depreciation.
That’s certainly what we do! (See attached.)
Putting your own plane in an LLC is like putting your personal residence in a corporation and renting it back and taking depreciation deductions. The IRS calls that fraud…quick way to go to jail. I used to work in the Chief Counsel’s office for the IRS in Washington DC years ago…it never ceased to amaze us the things people would try to deduct! Often times, with schemes dreamed up by their accountants…the taxpayers thought they were legal!
That said, if you have multiple partners, you could put a plane in an LLC or partnership, which entity could be characterized as being in the “business” of renting the plane, thus, entitling the plane to be depreciated. The key is that it must be a real business, with a profit motive and a realistic hope for profit. If the plane is rented only to the partners in the LLC who use it for personal use, I think you would be on shaky ground calling it a business. Further, each partner will have to pay rent at Fair market value rates ($180/hr??) to the partnership when they use the plane. If the plane is used for personal use, that rent payment is not deductible from the user’s income…meanwhile, each partner will also have to recognize their proportionate share of that rent payment as income when they allocate the income of the LLC among themselves. Initially, and hopefully, such income allocations ought to be more than offset by depreciation deductions. However, if the LLC shows a net loss, you might then have to be concerned about limitations on taking net passive losses. Further, when the depreciation is exhausted, you are faced with recognizing a lot of unnecessary rental income just to fly your plane. It might work out in the end…but I personally would be hesitant to sign the return if I knew the plane was rented back only to the owners and they used it predominently for personal use. In any event, this clearly would not hold up for a plane that is owned by only one person…
It wouldn’t surprise me if a lot of people do this. Essentially, they are playing the audit lottery.
I don’t get it airboy
I’m a little confused at this point on the whole tax issue. I own a fairly successful company but I am the sole owner. It’s registered in Nevada as an LLC. I am interested in buying my own plane as I like to travel and I could use it to get to conventions and for vacations. I was going to have my company purchase the plane as a write off. Is this possible or not? Am I better off just buying the plane personally?
Sorry for the questions, as you can see I normally just let my accountant handle all of this but he doesn’t know much about aviation in relation to taxes.
putting plane (or residence) in LLC and taking tax depreciation are two separate things arent they?
The way most small buisness owners structure it, is to set up an LLC (a separate business)which owns the plane.
Then, when the business owner needs to use the plane for buisness, he rents it from the LLC at fair market value and takes a sched C deduction. This is income to the LLC. When the business owner uses the plane for non-buisness use, he rents it from the LLC (still income to the LLC), but he can’t take a deduction for it on his business or personal return.
Any profit the LLC makes over the year is taxable.
Putting your own plane in an LLC is like putting your personal residence in a corporation and renting it back and taking depreciation deductions. The IRS calls that fraud
Maybe you are just generalizing, or maybe Cirrus is an accessory to fraud!!!??
Putting a home in an LLC may cause it to loose it’s “Homestead Exemption” status
And it would also subject the home to claims by creditors
at least part of the reason for using an LLC is NOT a tax issue, but rather a liability issue.
If my partner kills someone, I don’t want to be at the back end of a lawsuit. Only the aircraft would stand good for the debt.
Keeping the aircraft in an LLC or Sub S corp isn’t just for tax purposes. It’s tough digging people out the legal hole they often place themselves into.
Agree completely. Nothing wrong with putting a plane in an LLC, if you are concerned that someone else’s piloting the plane could create a liability issue for you. I don’t bother with it, because nobody flies my planes but me.
Actually, that is one issue we have spoken about. Are the S-Corp or LLC the same as far as limiting liability? As I understand it, it is, but the method of taxing is different.