Federal Income Tax – Overview
Although aircraft owners can deduct reasonable aircraft expenses incurred in business, the actual tax benefit is heavily influenced by the ownership and operating structure. The passive loss, hobby loss and listed property rules are examples of common issues that can limit the owner’s allowable expenses and are ripe issues on audit.
Personal use is another area that is heavily examined during audit. Personal use of a business aircraft is common. The IRS expects to see some. The issue is whether the impact of the personal use is reported properly on the tax return. In some cases, the business can provide the aircraft to an employee or owner as a fringe benefit, preserving the business deductions for the aircraft. In this case, the employee recognizes some imputed income on their personal tax return, generally at a very favorable rate based on the Standard Industry Fair Level (SIFL) rates. In other cases, there will be a proportional disallowance of expenses based on the amount of personal use.
Depreciation is usually the largest single expense item in the first years of ownership. Whether an aircraft can be depreciated and, if so, by what method depends on several factors including the extent of business use, the ownership structure, and whether the aircraft is operated under Part 91 or Part 135.
Finally, the sale of an aircraft will cause the owner to recognize income in the year of sale, known as depreciation recapture, based on the amount of depreciation taken in previous years to the extent of gain. This recapture income can be deferred with proper planning by directly trading in the aircraft or by completing a tax free like kind exchange.