As oil and gas acquisition and exploration escalates in the Bakken and other areas of the U.S., easy access to transportation is a must. Enter the airplane and conversations about ownership and usage of an "entertainment facility." The Internal Revenue Service identifies an aircraft as an entertainment facility that can be used for personal pleasure, and therefore, record keeping standards are significant.
Benefits
Some benefits of owning an airplane are convenience, dependability and availability. An airplane can be depreciated over five years if used more than 50% for business, which results in a large tax deduction. For business flights, 100% of the fixed and variable expenses are deductible. The personal use is deductible if, and only if, the value of the personal flight is included in the income of the person who is flying for non-business purposes.
Liabilities
Liability issues are of real concern when owning an airplane. Many advisors suggest owning the airplane in an entity that limits the liability of the owner and also protects the other assets of the business. Unfortunately, the FAA (Federal Aviation Administration) has rules about transporting others for hire or leasing the aircraft to others. These rules apply even if a limited liability company (LLC) owns the airplane for liability protection and then leases the airplane to the operating business. By owning the airplane in an entity other than the entity that contains the operating business, one may be subject to the passive activity loss limitations whereby rental losses are deductible only to the extent of passive income. For tax purposes, a separate entity may not result in the deductibility of expenses.
Some of the basic questions to ask and answer when considering airplane ownership are:
- What entity will own the airplane?
- Will passive activity loss considerations limit the deductibility of the expenses?
- Will there be business and personal use of the aircraft and if there is mixed use will the business use be more than 50% of the total use?
- How will the pilot be paid? Will the pilot be an employee or be a contract operator?
- Have insurance and liability issues been addressed?
Once it has been determined that an aircraft will be purchased and operated, records for the flights, persons on board and business or entertainment purposes must be documented. Those include:
- Documentation of the miles and hours of each flight (a flight is each leg of a trip where the passengers board and de-plane.)
- Listing each passenger by name aboard a flight and their business or personal purpose.
- Determining each passenger's title and classification as a control or specified individual, guest of a control/non-control or specified/non-specified employee, or another individual.
- Calculating personal use income to be included in an individual's wages or Form 1099, based on the fair market value of a commercial flight or the SIFL (Standard Industry Fare Level) rates published twice annually by the Department of Transportation.
- Accumulating 100% of the costs of the operation of the airplane and determining the non-deductible portion of expenses.
Owning and operating an airplane is not a decision that should be made without thoughtful consideration. This is an area that the Internal Revenue Service continually scrutinizes. Regulations set out very specific requirements for recordkeeping and if travel and entertainment documentation is not sufficient and contemporaneous, the taxpayer often loses in court.
But on the flip side, the convenience of easily accessible transportation and enhanced business opportunities, make the airplane an asset for increasing business profitability.
Please contact your advisor at Eide Bailly LLP to help you assess the risks and benefits of owning an airplane and determining whether this tool is right for your business.
