Ben Franklin supposedly said that in life, there are only two certainties - death and taxes. The former I'll leave alone, but do want to touch on the latter. Fiscal Cliff, fiscal road-bump, whatever it is called, may have an effect on both personal and corporate tax rates for 2013. I’m not offering tax advice, but just some food for thought.
An important note: while aviation taxes should not be a driving reason for an aircraft acquisition decision, the amounts can be substantial. Advance planning can potentially save thousands of dollars.
Here in the US, we essentially have two major taxing groups, the fifty states and the Federal Government. There are also a number of county and city tax authorities; some of these local taxes do apply to aircraft.
At the Federal level, the tax laws come via the Internal Revenue Service. The IRS separates aviation into two groups - commercial and non commercial. Don’t make the mistake that the IRS definition is in any way required to match that of the FAA Federal Aviation Regulations (FAR's) for commercial and non commercial operations. The IRS and FAA use different standards to define commercial operations and they have agreed to disagree.
The FAA uses regulatory definitions for a commercial operator. It involves the "intent" to hold one's aircraft out for hire. The IRS looks primarily at whether there is "transportation of persons or property for compensation or hire by air." Whether a profit is intended is not the IRS' concern. As Nel has stated ( click here for article), there are many times an operator is FAA Part 91 private but can be subject to IRS "commercial" taxes.
Many operators run afoul of the IRS in incorrectly figuring out how or whether to apply the Federal Excise Taxes (FET). Many local IRS offices are re-interpreting the FET law and are going after management companies. Add in the election year carriage of elected officials, transporting guests on corporate aircraft and international operations, and it can get confusing fast.
Next are the 50 US States Departments of Revenue and local county/city tax authorities. They are all slightly different. Some apply sales taxes. The seller of an aircraft may be required to collect and remit sales taxes on the sale of an aircraft. Many states offer some exemptions or exceptions. Property taxes can be applied to aircraft - some being based on the percentage of time the aircraft spends in the state and others flat rated for aircraft based in their state.
There are use taxes and fuel taxes applied at the state and county level. Some of those taxes get applied to the state's aviation fund and other just go into the general fund. Again, there may be exemptions for commercial operators.
All these government entities are having trouble with getting revenue. Even if the Governor pledged no new taxes, that doesn’t mean that the state cannot get very tough on enforcing the statutes already in place.
There are two words to the wise here.
- Paperwork is your friend, not your enemy. To prove that you do not owe certain taxes, you need to have the paper trail showing why. It can be tax receipts, aircraft registrations, hangar rent for the aircraft’s home base, whatever. Proper documentation is your friend as a "paper trail" can provide proof of the taxable/non-taxable activity and or its intent.
- Plan Ahead for the aircraft transaction. Before taking action, find out what the options are and their costs. Just because you have a Delaware LLC does not mean that your tax planning is complete! Work with your tax accountant/CPA to gover over the tax implications (and FAA regulations don’t forget). Trying to do this after the fact often proves costly.
Taxes are not a reason to acquire an aircraft, nor are they a reason to dispose of one. But, taxes, when properly planner for and accounted for, can make the total cost of operating the aircraft lower than ignoring them and hoping for the best!