For an FAA Part 91 aircraft owner who is looking to reduce the cost of their aircraft, one thing to consider is placing the aircraft onto a commercial certificate. By doing that, when the aircraft is not being used by the owner, it can be earning revenue by flying charter.
Since you can’t easily go out and get a Part 135 operating certificate, you will need to add your aircraft to an existing certificate holder. This involves a lot of work, and probably some expense on the owner’s part. Here are a few pros and cons to consider if you find yourself having this discussion.
You can generate revenue that will offset the cost of owning and operating the aircraft. As a rule of thumb, the aircraft owner typically gets 85% of the base charter rate while the certificate holder keeps the remaining 15%. The aircraft owner typically pays all the aircraft specific charter expenses such as fuel and maintenance. The excess of charter revenue over those expenses helps offset the fixed costs resulting in a net decrease in total cost to the owner.
The aircraft owner can still fly their own aircraft under Part 91, or they can elect to have the certificate holder operate their aircraft under Part 135. Under Part 135 operations, the certificate holder has operational control of the aircraft and crew, and thus, the liability for the charter flight rests with the certificate holder. If the aircraft owner wants to reduce their aircraft liability, this may be an option.
Charter activity is a business use of the aircraft. If the aircraft owner flies mostly personal, non-business use, the charter activity may qualify them to take a tax deduction for the business use of the aircraft.
The FAA has increased scrutiny of a Part 135 certificate holder. Charter operators are required by the FAA to have operational control of the aircraft and crew during all 135 operations. Operating under Part 135 places greater restrictions on aircraft and crew than does Part 91.
Putting an aircraft onto a charter certificate also requires that the aircraft meet the more stringent safety requirements for commercial operations. The initial conformity checks commonly result in additional costs to the owner as the aircraft must be brought into compliance with those standards. The aircraft must also be maintained to the certificate holder’s approved maintenance practices. This means that all maintenance must be coordinated through the certificate holder. This adds some cost and complexity to the aircraft maintenance function.
The owner may wish the crew to be employed by the certificate holder. The owner’s crew can’t just start flying 135 operations, even if they are as well or better qualified as the certificate holder’s crew. If the owner’s crew is to fly for the certificate holder, that certificate holder must be able to show they have control over the crew and that the crew (much like the aircraft) meets with their approved training program and has drug testing.
As the aircraft owner is not actively involved in the charter business, the IRS considers the charter income as passive income, much like rental income. So tax planning for the aircraft owner gets more complicated. Thus, the aircraft owner needs a careful review with an aviation tax person.
There are more tax issues with for-hire flights. Federal Excise Taxes are due on the aircraft charter income. The charter operator commonly handles this. The tax depreciation status of the aircraft may change. In general, an airplane in not-for hire business-use may qualify for a 5-Year accelerated tax depreciation schedule. If the predominant use is commercial for-hire, the IRS limits an airplane (but not a helicopter) to a 7-year accelerated tax depreciation schedule. Contact my partner Nel Stubbs about this (602-404-1854 or email@example.com) or for any aviation tax issues.
Your aircraft insurance and lease or mortgage documentation needs a thorough review to ensure the commercial activity is a permitted use. This may be a pro if the certificate holder has a fleet insurance policy that offers a lower policy cost to the aircraft owner.
Lastly, wear and tear will increase on the aircraft. Not only due to the increased flying in general, but charter customers may not treat the aircraft interior as well as the owner. In the case of some rock bands, they will mistreat the interior!
For an aircraft owner placing their aircraft onto someone else’s commercial certificate requires careful planning and compromise. The arrangement can be beneficial for both aircraft owner and charter operator, but only if both parties compromise, cooperate and communicate.