Taking tax depreciation

An S corp and an LLC should be the same for liability purposes. As I have seen discussed on the board here, all that any form of entity shield provides (be it S corp, LLC, limited partnership) is protection from personal liability for actions of another. The asset in the entity (the plane) is available to the entity’s creditors or plaintiffs in all cases. The owner remains liable for his own actions in all cases. Thus, if you forget to put the oil drain plug in, your partner goes flying and crashes, you could still be liable for negligence re the drain plug.

S Corps are taxed somewhat similar to partnerships…income, deduction, credits etc are allocated to the owners. Losses cannot be passed through in excess of tax basis in the S corp stock. An LLC with multiple owners will typically be taxed strictly by partnership rules. A single owner LLC is usually disregarded for tax purposes…you are treated as owning the plane directly. This has no effect on the liability issue.

Thanks for your reply. This seems to be the recurring opinion I see by the people that seem to be the most knowledgable about it this topic…unfortunately.

Eddie,

You’re repeating yourself!!! Just Kidding, I saw the disclaimer on the other post. [;)]

Rachel, it depends on how much you use it for business travel. If it is predominantly used for personal trips, I’d say it’s not worth trying to depreciate it for tax purposes.

Taking depreciation, whether accelerated or not,I believe, is a factor of purchase price versus sale price.
Depreciation is a good thing, but the thing has to depreciate.
After that, you must sell it for the depreciated price or recapture the depreciation.
Thus, if understand the concept correctly, if you buy for 300k and get accelerated depreciation of 75% (for the sake of discussion) you have to sell it the next year for $75k or recapture the depreciation on sale of a higher amount.
Conversely, as most likely in my case, I own an antique Cirrus. While I am depreciating it in regular mode, there is less to recapture. In my case, I may even sell it for more then it cost me. If that happens, I will recapture the depreciation, and might even make a profit.
Problems problems problems.
But then again, I am no accountant. So even when you win, you loose. Golly, I am so confused
How is it that the Rockafellers and Hursts get away with it.
P.S. Is there a Rich Peoples Tax Avoidance web site.
NOW that would be wouth $50 bucks.

You described the depreciation very well…but that, relatively speaking, is the painless part. The part that hurts on these type planes is recognizing income everytime you fly it for a personal flight. That phantom income can easily outweigh the benefits of depreciation.

You are reporting all that phantom income, I assume??!!

You could also view this as an income deferral option. Why pay taxes today when you can wait and pay them perhaps years down the line. Also, as long as you buy a more expensive airplane, when you upgrade, you keep deferring the taxes. Then someday when you decide to stop flying, you settle up with the taxman for recaptured depreciation.

In reply to:


You are reporting all that phantom income, I assume??!!


Dave, I am a professional, a wheeler, a dealer, and a fisherman. How can you ever doubt that all of us self styled business people would not want to fess up, and pay our fair share to our country.

Dave -

Regarding the “imputed income”, I’m really not sure its that big a problem. For 4Q03, the income formula (SIFL=standard industry fare levels) for a round trip in a light aircraft by major shareholder in the owning corporation was $35 + ~0.18c/mile. On a 500 sm trip, that would be imputed income of $125. And the tax on that at 35% would be $44.

Assuming you can write off the expenses of owning the plane at the same income tax rate, it is a sure winner. The ability to write off the expenses, though, can be tricky. Advocate Tax and others are expert in the field and well worth consulting.

In reply to:


maybe Cirrus is an accessory to fraud!!!??


I am not a tax specialist (and don’t even play one on TV[;)]) but I am half way familiar with this, having spent a considerable amount of study on taxation. And if I misstate anything, please feel free to correct me…

Cirrus is not committing fraud, they are simply telling you that:

If you “qualify” then you get the accelerated depreciation of up to 71%. Note the “Qualified Tax Payer” language…How do you qualify? Best way is 100% business use…

With respect to business construct and use, one other mechanism not mentioned herein this thread is a leaseback…you buy the aircraft, place it on leaseback, and your holding entity, LLC, S Corp, whatever, is now a legitimate business. There are several variations on this theme, but in essence when you want to fly you rent the plane like everyone else. You reduce your rental pilot wear and tear by having very high check out standards - e.g. 20hrs in type, IFR, 500hrs min, and $250/hrs, etc…your “business” then can take the full depreciation which would flow to you prorata to your ownership and business structure. Note that IF you sell the aircraft, as stated by several others here, you will have a recapture. Hold the plane long enough and the recapture may be reduced significantly as the actual value catches up with the accelerated depreciated value.

There are several creative, but very legitimate, ways to take advantage of aircraft ownership. You need to plan it out in advance and keep good records…

A side note - when preparing your taxes, don’t forget that you can also deduct certain training costs.

And a quick plug: I would add that I have a “fractional” aircraft…actually a use license…and there are certain tax advantages to this as well…financially it is a superior (IMO) deal with respect to the NPV (depending on your circumstances) and debt loading…and a great way to get into a Cirrus aircraft in a relatively inexpensive way…for details, one can email me…

To sum up - It does take some work and study (by both the pilot and his/her tax professional) but you can make aircraft ownership less painful, but unless your 100% business or fly for a living, it ain’t cheap…

Disclaimer: All of this is IMO. The above is not actual tax advice…if this were actual tax advice you would be invoiced…check with your tax professional. Your results may vary. Past performance is no guarantee of future results…yada yada…

"A side note - when preparing your taxes, don’t forget that you can also deduct certain training costs. "

Except for the rental schools that have bought Cirrus’s, I suspect virtually everyone on this board flies their plane overwhelming for personal use…not business use. Merely incorporating your plane and leasing it to yourself does not make it a business, it makes it an incorporated hobby. The tax law is absolutely full of legal cases of taxpayers trying to deduct their sportscar hobby, their horseriding, and so on. They always lose.

Further, it is very much a misstatement to suggest that anyone, OTHER than an existing CFI who incurs continuing training costs, could deduct their pilot training. Education that improves ones existing professional, business skills is deductible. All other is not.

Note that the Cirrus ad suggests the plane is fully depreciable if 30% of the time on the plane is used for business purpose. Other than flying schools that rent Cirrus planes, I would challenge anyone on this board to show that 30% of the hours on their Cirrus is for legitimate business trips.

Setting aside liability concerns for a moment, isn’t the whole business point/purpose of depreciation the following?: the only “free lunch” with business asset depreciation is that you can is defer business income tax via depreciation until you recapture the depreciation. The business advantage is that until you have to recapture, then you get to use the depreciated amount of cash for business growth/investment for free. It’s like getting a free loan from the bank(actually double the amount since it is untaxed and I am assuming that people thinking about doing this are in a high tax bracket). The “loan” still has to be eventually paid back and the business has hopefully invested and made this depreciation money “grow” in the meantime. If the business spent this depreciaton money or had a negative ROI on this money, then having taken the depreciaton was a poor business decision and they will have a whopper of a tax bill. The only avenues I can see out of diminishing the tax hit of recapture are three:: the business declares bankruptcy, or as in a subchapter S the pass through income is done years later and the owners are in a substantially lower tax bracket, or the asset severely depreciates and you’ve lost a lot of money anyway…So, basically it is leveraging…if you can use that leveraged depreciation cash positively it is a plus. If your leveraged cash via depreciation is negative…watchout.

That is a fair assessment of how depreciation works. With airplanes, there is an additional boogy man: the SIFL income rates. For every hour of time spent flying the plane for personal use, each non-business person on the plane must report the value of the flight as income.

In reply to:


… incorporated hobby.


Agree completely

In reply to:


…missstatement to suggest that anyone, OTHER than an existing CFI who incurs continuing training costs, could deduct their pilot training.


I suppose I should have used the phrase “may be able to deduct”
But I somewhat disagree…to the extent that the training furthers your business, it is deductible to a degree and sometimes to a large degree…For example, if you use your single pilot Citation 100% for biz, flying to your various mega-enterprises around the country, then you CAN deduct your regular Flight Safety training. I can’t site the IRS finding right off the top of my head, but this seems to me to be very clear and justifiable from my review of tax code and various findings. I could be wrong and would appreciate knowing even though (are you listening IRS?) it is not applicable to my circumstances

If you fly marginally on business and deduct ALL of your flight training? That is taking the slippery slope to auditville…it’s the in between cases that are often deductible, and fully justifiable…

In reply to:


… depreciable if 30% of the time on the plane is used for business purpose…I would challenge anyone on this board to show that 30% of the hours on their Cirrus is for legitimate business trips.


For me you’d be correct (at least this year) but I can’t speak for others…numerous impressive business types here that I could imagine doing alot of biz flying…don’t know the origin of the magical 30%…perhaps a tax court finding? Anyone out there know?

Same disclaimer applies…this is not tax advice and I am far from a tax expert…check with your tax professional…etc.

Dave,

Other than the fact that you are anonymous and giving grossly inaccurate advice, I have no problems with you.

Numerous tax cases have held that business people using an aircraft for the business can deduct the aircraft expenses including depreciation and training. The key here is that you are not hired by the business to be the pilot. If, for example, you are a salesman, who makes a better salesman by flying, then this is a legitimate business expense.

The IRS has conceded that flying is a skill which requires initial and recurrent training. Without training pilots kill themselves and destroy the business assets. So it would be ordinary and reasonable for a pilot flying a plane for business to deduct training expenses.

Also, post 9-11, is it all that hard to believe that a businessperson would find GA a viable alternative to commercial air travel. Could the IRS even begin to make a case that this should be disallowed when key members of our government refuse commercial travel. I know that each and every business has employees that are just as important as these federal employees.

In reply to:


Other than flying schools that rent Cirrus planes, I would challenge anyone on this board to show that 30% of the hours on their Cirrus is for legitimate business trips.


Again… A generality…

I use my plane more than 50% of the time on business… I am the VP of stores for a retail company with stores from Maine to Florida and from the Atlantic Ocean to Nebraska…

I fly to the cities to check up on the stores and the district and regional management…

Having the plane allows me to get directly into the cities I want to visit, without delay and connections…

This is a real assets that allows me to be more flexible and effective… Not to mention the fact that everyone knows that I could show up anywhere at anytime… That is worth its weight in gold…

While I do fly on a personal basis, it is much more infrequent…

Dave,

  1. You actually DO appear to be anonymous. Registered COPA members have their info shown by their names in posts. Clicking on your name does NOT show any information (email address, etc.). At least we have a name, now (though we shouldn’t have to “look it up”).

  2. I was under the impression that education needed to MAINTAIN a job status was deductible, but those to ADVANCE job status are not. So I went to http://www.irs.gov and looked it up:

In reply to:


Topic 513 - Educational Expenses

You may be able to deduct work–related educational expenses paid during the year as an itemized deduction on Schedule A of Form 1040 (PDF). To be deductible, your expenses must be for education that:
Maintains or improves skills required in your present job;or
Serves a business purpose of your employer and is required by your employer, or by law or regulations, to keep your present salary, status, or job.

Your expenses are not deductible if the education is required to meet the minimum educational requirements of your job, or is part of a program of study that can lead to qualifying you in a new trade or business.


I’m NOT a tax expert. I’ve always deducted expenses required to maintain my CFI - publications, Flight Instructor biannual recertification expenses, etc. I have NOT deducted expenses incurred to get NEW Flight Instructor ratings. IOW, If I decided to train for a Seaplane Instructor rating I would NOT deduct the expense. Once I had it, I WOULD deduct any expenses incurred to maintain it. I admit that the IRS quote “improves skills required in your present job” MIGHT make some of those expenses deductible, if Seaplane instruction was already part of my “present job”.

Other than the fact that you are anonymous and giving grossly inaccurate advice, I have no problems with you.<<

Well…I have a problem with you. 1) I am no more anonymous than any other person on this board. My name is David Brandon, I live in Washington DC. Look it up. 2) Not only were my general comments about tax deductibility of the plane and training accurate, they were not inconsistent with your own comments. I have never said that a plane legitimately used in business is not deductible. Training to improve one’s business skills is also deductible, as I said, such as a CFI working as an independent contractor for a flight school. I don’t dispute that training might also be deductible if a pilot flies for business…but as I postulated, I expect the overwhelming number of Cirrus hours are for pleasure. I was responding to suggestions that merely putting a plane, used for personal flying, in your own LLC and leasing it back to yourself, made it a legitimate business asset. It doesn’t. Nor can a pleasure flyer deduct training cost. To suggest otherwise is grossly inaccurate advice. If your’s is a legitimate business asset, good for you. Deduct away.

Dave:

Sorry that I was a bit strong. I thought you were implying that it would be near impossible for even legitimate business use to qualify especially for training.

– Andy

[:D][:D][:D]LMAO!!!

Great stuff, Dennis!! The shocking thing is that the Emu pic reminded me of my first wife…