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will significantly soften the blow for most business aircraft operators replacing their business aircraft within the tax year.
Clarification of No Excise Tax for Part 91 Flights Pursuant to a Management Agreement
Thankfully, the TCJA puts to bed a topic of ongoing controversy with respect to aircraft managed by Part 91 management companies. Prior to 2012, the longstanding rule had been that an aircraft owner/lessee making payments to a Part 91 management company for the care and operation of the aircraft was not creating a commercial-transportation arrangement and, therefore, did not trigger the air- transportation excise tax (FET).
In 2012, the IRS upended this understanding with a contrary interpretation, which posed an existential threat to the Part 91 management industry. Numerous audits ensued, many of which have now been held in stasis for years as the IRS re- evaluates it policy. The TCJA makes clear that, at least going forward, these Part 91 management fees will not be subject to FET. Further, it is expected that the IRS is now unlikely to assess tax on these arrangements for earlier periods.
Adjustments to Deductibility of Flights
Along with the new tax incentives and clarifications came the loss of several deductions commonly taken in our industry. Travel connected to business entertainment is no longer deductible starting in 2018. These trips arguably fall under the same disallowance formula and methodology provided by 26 C.F.R. 274-10, the regulation that addresses entertainment use of aircraft. 274-10 provides that all expenses associated with the aircraft, including tax depreciation and other fixed costs, must be disallowed per passenger seat in the event of entertainment use. Accordingly, the economic impact of this adjustment will be significant for taxpayers that use the business aircraft for business entertainment trips.
Additionally, the TCJA adds a new subsection to Section 274 (26 U.S.C. § 274 (l)), that provides that commuting flights provided to employees on company aircraft are no longer deductible trips at the company level. While commuting has never been considered a business
expense, many commuting trips have
previously remained deductible at the
company level if they were provided as
compensation to the employee.
The continued availability of this fringe deduction at the company level appears significantly restricted under the new law when a business aircraft is being used for travel between home and work. If your company aircraft is used for commuting trips, speaking with a tax lawyer about their on-going deductibility is prudent as you plan usage moving forward.
Tax Rate Changes for C-Corporations & Deductions for Pass-Through Entities
Finally, the provisions that may most significantly impact the structuring of business aircraft acquisitions and operations are not industry specific; they impact all business practices for U.S. taxpayers. Corporate tax rates have been substantially reduced to 21 percent, and for some pass-through businesses, there is a newly available deduction for up to 20 percent of the income generated.
The pass-through income reduction, which has the potential to provide substantial tax relief on aircraft recapture income and other business revenues, is very complex and requires a close analysis of the company type, income level, wages paid, and the assets held by the entity. Standard industry practice must adjust to the new reality that business entities will be subject to different rates and that owners and operators may need to adjust expense allocations to ensure that the tax liability is minimized where appropriate and properly determined. Changes to the treatment of carryforward losses and interest deductions may also impact business planning.
The Time is Now
Tax reform is exciting, and the impact of the TCJA should be to strengthen investment in aircraft and aviation equipment. There is reason to believe that uncertainty regarding reform has left many potential aircraft buyers on the sidelines waiting for clarity in years prior. With strong pre-owned inventory and many new aircraft models available for business investment and use, 2018 is forecasted to be a robust year for the industry.
Whether you are considering a purchase or you are already operating a business aircraft but want to ensure that your deductions are preserved, it is critical to work with an aviation tax lawyer to help you navigate the many opportunities that await. The time is now. T&T
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March 2018
TWIN & TURBINE • 19
Suzanne Meiners-Levy is a Partner and the Pro Bono Coordinator at Advocate Consulting Legal Group, PLLC (ACLG). ACLG is a boutique legal practice, employing more than lawyers, CPAs, accountants and para- professionals to exclusively serve the legal and tax planning needs of the general aviation aircraft owners
and operators. Suzanne has been certified as an aircraft leasing expert witness in both state and federal courts, and is a member of the Bar in Florida, Texas, Tennessee, New York, and the United States Tax Court. She is a sought-after public speaker on tax matters, presenting at a range of aviation professional events. Suzanne graduated summa cum laude from Vanderbilt University and magna cum laude and Order of the Coif from NYU School of Law