Aircraft Tax Planning & Impact On Budgeting For Flight ... · 6/19/2012 · Straight Line Depreciation - Tax • Used to calculate depreciation when MACRS doesn’t apply (e.g. –

Aircraft Tax Planning & Impact On

Budgeting For Flight Departments

Presented by: Alan Goldstein

Citi Corporate Aviation

NBAA Live Webinar | June 19, 2012

2

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interested in earning points towards your initial application?

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Initial and Recertification points.

To qualify for credit you must respond to all poll questions.

Live NBAA Webinar June 19, 2012

3

CITIGROUP CORPORATE AVIATION 79 TOWER ROAD HANGAR E

WESTCHESTER COUNTY AIRPORT WHITE PLAINS, NY

(212) 559-4812 Alan Goldstein is a CPA and has an MBA in Taxation. He is employed as The Director of Finance for Citigroup Executive Services in their New York corporate headquarters. He also is a member of Citigroup’s flight department management team, where his responsibilities include overseeing all of the aviation department’s accounting and bill payment functions. In addition to his financial responsibilities, he has purchased or sold approx. 40 jet powered aircraft over the years and he insists that Citi has come out ahead on all of the transactions. Alan is a Past Chairman of the NBAA Tax Committee and has been a guest speaker at NBAA Tax Conferences and Forums. He has served as an advisor to many of our NBAA members on accounting and tax issues, such as excise tax audits and personal use of aircraft.

Live

NBAA

Webina

r June

19,

2012

• DISCLAIMER

This presentation is intended to provide general information about aviation

regulations, taxes, depreciation, accounting, budgeting and related issues. Such

information should not be relied upon as a substitute for accounting, legal or tax

advice from an experienced advisor, who has applied the applicable rules to the

specific facts and circumstances of your particular situation. You should ask your

chosen advisor to provide you with advice in a form that you can rely upon before

you acquire or operate an aircraft or enter into any transaction. Information

contained herein and any information that you have otherwise received from us

was neither intended nor written to be used and cannot be used for the purpose

of avoiding tax penalties under U.S. law or for promoting, marketing or

recommending to another party any tax related matters.

4

Alan Goldstein NBAA Webinar June 19,

2012

Topics to be Reviewed & Covered

1. FAA Aircraft Operating Structures

2. Tax & Accounting Depreciation Concepts for Corporate Aircraft

3. Fixed & Operating Costs

4. Heavy Maintenance Expenditures

5. Sales Taxes

5 Alan Goldstein NBAA Webinar June 19, 2012

Introduction

• Overall Purpose of this Presentation – To Introduce

FAA Structure Concepts and Considerations

– Private [FAR Part 91]

• Part 91 Special Purpose Entity Prohibition

– Charter [FAR Part 135]

– Hybrid of Part 91 & 135

Live NBAA Webinar May 1, 2012

6

Part 135

• Most aircraft owners who wish to have their aircraft available for

charter lease the aircraft to an existing charter operation

• HYBRID 91-135: Lease the aircraft to a charter company BUT

the aircraft owner retains the right to operate the aircraft under

FAR Part 91 for their own use

Live NBAA Webinar| May 1, 2012

7

FARs vs. IRS RULES - Commercial • The FAA and the IRS do not speak the same language

• However, this may not be a bad thing

• IRS Revenue Ruling 78-75

– The IRS does not consider the FAAs definition of a commercial operator determinative in deciding which taxes apply (excise or fuel

taxes , depreciation schedules, etc.). • FAA (Profit IS a motive, “Holding Out”)

• IRS (Profit is NOT a motive)

• Safety vs. Economics

8 Alan Goldstein NBAA Webinar June 19,2012

CONTROL

• FAA Operational control

– Exercise of authority over -- Initiating,

Conducting, or Terminating a flight

• IRS Possession, Command and Control

– Possession => Ownership, Lease, Insurance

– Command => Scheduling, Availability

– Control => Pilots, who has aircraft use

9 Alan Goldstein NBAA Webinar June 19,2012

INCOME TAX BASICS

• Aircraft ownership and operation can generate

beneficial federal & state income tax advantages

– Tax advantages limited to actual business

use of aircraft

– No tax advantages where an aircraft is acquired

or operated for personal purposes or otherwise

not incidental to the business of the taxpayer


10

Part 1: Aircraft Acquisition and

Operations

General Concepts • Many aspects of business aircraft ownership and operation are

subject to federal and state income taxes

• Certain costs related to aircraft operations are treated as “ordinary and necessary” expenses under IRC §162 for which a deduction is allowed in the year of payment

– Must be appropriate for carrying on taxpayer’s business and reasonable in amount

– Costs that are expensed do not impact the tax basis, discussed below

• The cost of purchasing an aircraft and some major repair costs must be capitalized, meaning that the costs are added to the tax basis and allowed to be depreciated over time

• From a time value of money perspective, expense deductions are better than depreciation because you get the benefit sooner

11

Jeff Towers NBAA Webinar May 8, 2012

Deductible Expenses:

Currently Deductible vs. Capitalized

Costs vs. Non-Deductible

• Deductible Expenses

• Non-Deductible Expenses

• What is a Deductible Expense?

– “Ordinary and necessary expenses paid or

incurred during the taxable year in carrying

on any trade or business.”

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General Concepts

• A starting point for discussion of depreciation is the concept of tax basis

• Tax basis equals the original purchase price of an aircraft, less one time adjustments for 1031 exchanges, section 179 deductions and bonus depreciation, less annual adjustments for regular depreciation, plus the cost of capital improvements by the taxpayer

• Tax basis is used to determine:

– the amount of the allowable annual deductions and

– the amount of taxable gain or loss on a sale

• difference between the adjusted tax basis and the sales price

13 Jeff Towers NBAA Webinar May 8, 2012

Tax Depreciation

• A business aircraft owner is allowed an annual deduction on its

income tax return for depreciation

– business aircraft are used in a “trade or business” and are

subject to “exhaustion, wear and tear, and obsolescence”

over time (IRC §167)

• Depreciation deductions reduce the tax basis on a dollar for

dollar basis until the basis has been reduced to zero

• Depreciation deductions are only allowed on the business use of

an aircraft

– Transporting taxpayer’s own personnel and property

– Leasing without crew

– Commercial or contract carrying of passengers or freight

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Depreciation Method

• IRC §168(b) provides that business aircraft are depreciated using one of two methods:

– Modified Accelerated Cost Recovery System, generally referred to as MACRS, and

– Alternative Depreciation System, generally referred to as ADS or straight line depreciation

• MACRS used to calculate depreciation unless disqualified for reasons below

• MACRS deductions are weighted heavily in the first few years of ownership

– Time value of $ benefit

15


16

The Modified Accelerated Cost Recovery System (MACRS) is mandatory

for most tangible depreciable property placed in Service after December 31,

1986. Property is depreciable if it wears out, has a determinable life that

exceeds one year, and is used in a trade or business or for the production

of income.

Alan Goldstein NBAA Webinar June 19,2012

MACRS Schedules: Recovery Period

• One of two MACRS schedules could apply to

business aircraft

– 5-year MACRS: Fixed wing aircraft (except those

used for commercial or contract carrying of

passengers or freight) and all helicopters

– 7-year MACRS: All aircraft used for commercial or

contract carrying of passengers or freight except

helicopters

• If aircraft use falls partially in each category, the

MACRS schedule for the predominant use (more than

50%) applies

– If aircraft is leased, look through to lessee’s use to

determine predominant use

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Qualifying for MACRS • Under IRC §280F aircraft must be predominantly used (more

than 50%) for a “qualified business use”

– Use in a trade or business of the taxpayer

• Could be Part 91, Part 135 or a combination

– If qualified business test not met taxpayer must depreciate

using straight line

• Caution!: Certain business uses of aircraft do not count as a

qualified business use unless other qualified business uses

comprise at least 25% of the aircraft use in each year

– Lease to 5% or more owner or related party

– Use of aircraft as compensation to 5% or more owner or

related party (i.e. – personal use)

– Use of aircraft as compensation by anyone who is not a 5%

or more owner or related party unless income tax is paid (e.g.

– using SIFL rates)

• Aircraft must be predominantly used (more than 50%) in U.S.

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Qualifying for MACRS

• If aircraft is used for non-qualifying use (such as

personal use) in any year during the depreciation

period, the depreciation deduction for that year is

reduced by the percentage of non-qualifying use, but

the tax basis is reduced by the full amount

• If use of an aircraft fails to satisfy the predominant use

tests for business use or U.S. use in any year during

the depreciation period, MACRS no longer applies

and any prior deductions which exceed the amounts

allowed under straight line depreciation must be

“recaptured”

– Tax on recaptured amount becomes due

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Straight Line Depreciation - Tax

• Used to calculate depreciation when MACRS doesn’t apply (e.g.

– 50% or more non-business use or 50% or more non-U.S. use)

• Equal deductions each year during the depreciation period

• One of two straight line schedules will apply to business aircraft

– 6-year straight line: Fixed wing aircraft (except those used for

commercial or contract carrying of passengers or freight) and

all helicopters

– 12-year straight line: All aircraft used for commercial or

contract carrying of passengers or freight except helicopters

• Correct category for mixed use aircraft is determined in the same

manner as discussed above with MACRS

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Conventions • Conventions are used to determine the amount of depreciation

that can be taken the first year, which also affects the

depreciation amounts in subsequent years

• Half Year Convention: an aircraft purchased anytime before the

end of the taxpayer’s 3rd quarter will be treated as if it had been

purchased in the middle of the year

• Mid-Quarter Convention: an aircraft purchased anytime during

the taxpayer’s 4th quarter will be treated as if it had been

purchased in the middle of the quarter, assuming that 40% or

more of all MACRS property purchased by the taxpayer was

acquired in the 4th quarter

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Calculating Depreciation - Tax

• Need to determine

– Depreciation method

– Recovery period

– Convention

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5/7 MACRS

Mid-Quarter Convention

Placed in Service in Fourth

Quarter

Year

1

2

3

4

5

6

7

8

5-Year

20.00%

32.00

19.20

11.52

11.52

5.76

7-Year

14.29%

24.49

17.49

12.49

8.93

8.92

8.93

4.46

5/7 Year MACRS

Half-Year Convention

Year

1

2

3

4

5

6

7

8

5-Year

5.00%

38.00

22.80

13.68

10.94

9.58

7-Year

3.57%

27.55

19.68

14.06

10.04

8.73

8.73

7.64

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Straight Line Method

Half Year Convention

Straight Line Method

Mid-Quarter Convention

Placed in Service in Fourth

Quarter

Year

1

2

3

4

5

6

7

8

9

10

11

12

13

6

8.33%

16.67

16.67

16.67

16.66

16.67

8.33

12

4.17%

8.33

8.33

8.33

8.33

8.33

8.34

8.33

8.34

8.33

8.34

8.33

4.17

Year

1

2

3

4

5

6

7

8

9

10

11

12

13

6

2.08%

16.67

16.67

16.67

16.66

16.67

14.58

12

1.04%

8.33

8.33

8.33

8.33

8.34

8.33

8.34

8.33

8.34

8.33

8.34

7.29

24


25

IRS Depreciation @ 5 YR. Life

$2.0 million interior & avionics

Year 5 Yr Life Dep deduction

1 20.00% $400,000

2 32.00% 640,000

3 19.20% 384,000

4 11.52% 230,400

5 11.52% 230,400

6 5.76% 115,200

total $2,000,000

Alan Goldstein NBAA Webinar June 19, 2012

Depreciation Tax - Definition

Depreciation – Tax is the annual deduction

allowed to recover the cost or other

basis of business property with a useful

life of more then one year.


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Depreciation - Accounting is a system which aims to

distribute the cost or other basic value of tangible

assets, less any salvage value over the estimated

useful life of the asset in a systematic and rational

manner.

Straight line depreciation is the most widely used

method.

ACQUISITION COST - ESTIMATED SALVAGE VALUE = DEPRECIATION CHARGE

ESTIMATED USEFUL LIFE IN PERIODS FOR EACH PERIOD

EXAMPLE:

$2,200,000 - 200,000

___________________ = $200,000 per year

10 years


Depreciation Tax & Book $ Comparison

• Tax Deduction

$13,500,000 asset / 5 years = $2,700,000 average per year

• Book Deduction

$13,500,000 - $0 salvage / 20 years = $675,000 per year



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XXX

XXX


31

AIRCRAFT OPERATING COSTS

DEPRECIATION ALTERNATIVES

($ 000's)

5 YRS 7 YRS 10 YRS 12 YRS 16 YRS 20 YRS

TOTAL DIRECT COSTS 712 712 712 712 712 712

TOTAL FIXED COSTS w/o dep. 723 723 723 723 723 723

DEPRECIATION ($13.5 million aircraft) 2,700 1,929 1,350 1,125 844 675

TOTAL FIXED COSTS 3,423 2,652 2,073 1,848 1,567 1,398

TOTAL COSTS 4,135 3,363 2,785 2,560 2,278 2,110


Direct & Fixed Costs - Definitions

• Direct Costs -

- Costs that are directly related to the operation of the aircraft. They are

variable in nature. Costs increase as usage increases, if no usage then

no cost. Examples include fuel, maintenance, crew T&E, catering, etc.

• Fixed Costs -

- Costs which remain fixed and are not dependant on volumes or

usage. Examples include salaries, hangar and airplane leases,

insurance, depreciation, etc.


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AIRCRAFT OPERATING COSTS

DEPRECIATION ALTERNATIVES

5 YEARS 7 YEARS 10 YEARS 12 YEARS 16 YEARS 20 YEARS

DIRECT COSTS

FUEL 340,000 340,000 340,000 340,000 340,000 340,000

MAINTENANCE LABOR 70,000 70,000 70,000 70,000 70,000 70,000

MAINTENANCE PARTS 113,500 113,500 113,500 113,500 113,500 113,500

ENGINE OVERHAUL RESERVES 75,000 75,000 75,000 75,000 75,000 75,000

AIRCRAFT TRIP EXPENSE 45,000 45,000 45,000 45,000 45,000 45,000

CREW TRIP EXPENSE 68,000 68,000 68,000 68,000 68,000 68,000

TOTAL DIRECT COSTS 711,500 711,500 711,500 711,500 711,500 711,500

FIXED COSTS

SALARIES AND BENEFITS 378,000 378,000 378,000 378,000 378,000 378,000

HANGAR RENT 75,000 75,000 75,000 75,000 75,000 75,000

INSURANCE 48,000 48,000 48,000 48,000 48,000 48,000

CREW TRAINING 53,000 53,000 53,000 53,000 53,000 53,000

AIRCRAFT UPGRADE RESERVES 40,000 40,000 40,000 40,000 40,000 40,000

INTERIOR REFURBISHING RESERVES 29,000 29,000 29,000 29,000 29,000 29,000

OTHER FIXED COSTS 100,000 100,000 100,000 100,000 100,000 100,000

TOTAL FIXED COSTS 723,000 723,000 723,000 723,000 723,000 723,000

DEPRECIATION ($13.5 million aircraft) 2,700,000 1,928,571 1,350,000 1,125,000 843,750 675,000

TOTAL FIXED COSTS 3,423,000 2,651,571 2,073,000 1,848,000 1,566,750 1,398,000

TOTAL COSTS 4,134,500 3,363,071 2,784,500 2,559,500 2,278,250 2,109,500

34

Maintenance Budgeting


35

Falcon 900EX 800 hours

Item Notes Quantity Cost

Avantex FAR Library $ 76.00

APU St/Gen O/H 1 $ 2,500.00

Bat Annual Check Page, Jet Pak $ 1,325.00

Bulbs $ 1,500.00

Bulletins $ 12,000.00

Cabin Interior Repairs Misc. Repairs $ 7,000.00

Coalescer Socks 2 $ 1,250.00

Contract APU MSP 1/1/12 - 12/31/12 (Nov 11) $ 13,500.00

Contract CAMP 4/1/12 - 3/31/13 $ 9,500.00

Contract MSP 800Hr X $146 X 3 $ 350,400.00

Contract VS Cleaning $ 44,652.00

Eng St/Generator O/H 4 $ 10,000.00

Engine R&R MPI 2500 Eng Hr (Aug ?) 3 $ 12,500.00

Pylon Insp At Eng R&R 2 $ 500.00

36

Falcon Revisions Paper, CD $ 2,750.00

Filters / Gaskets Water 4 $ 1,300.00

Fire Bottle Hydro 7 $ 3,020.00

Fire Bottle Cartridges 11 $ 9,100.00

Hardware Replacement Misc. $ 2,000.00

Hydraulic Oil Sample 2 $ 800.00

Inst Rep $ 15,000.00

Life Vest Recert. 15 $ 255.00

Oil / Hyd 2 cases / 2 cases 4 $ 800.00

Oxy / Nit 1 of each refilled twice $ 820.00

Pitot / Static Checks FAR 91.411 Checks $ 1,400.00

Raft Recertification Insp. And Repair 2 $ 2,000.00

Smoke Hoods Recert. ~

Survival Bags Replacement ~

Tool Rental (Special Insp) $ 2,500.00

Transponder Updates 2 ~

Wheel Main Inspection / NDT 10 $ 4,500.00

Wheel Nose Inspection / NDT 2 $ 1,400.00

Wheel Tires $ 10,500.00

Total $ 524,848.00

37

Hangar Facility Costs

Item Notes Quantity Cost

Air Hoses $ 200.00

Brooms $ 80.00

Boots, Rubber $ 250.00

Contract AIS Station License $ 1,000.00

Contract AIS Inventory $ 3,410.00

Contract Cleaning $ 44,652.00

Cleaning/TempHelp/Supplies $ 4,500.00

Clothing $ 3,800.00

Drop Lights 4 $ 650.00

Elect. Supplies Fclty $ 2,000.00

Equipment Calibration $ 10,000.00

Equipment Oil / Fuel $ 1,400.00

Equipment Parts / Service Tugs/Vehicles $ 6,400.00

Extension Cords 6 $ 225.00

Exterminator $ 1,500.00

38

Fire System Annual Check ISS $ 2,200.00

Fire Extinguisher Inspections OSP $ 600.00

Garbage Collection Suburban $ 8,500.00

Golf Cart Upkeep $ 500.00

Hangar Doors Yearly P/Maint Insp/Lube $ 12,000.00

Hangar Drains Cleaning Safety Kleen $ 800.00

Hangar Water Filter Cartridges $ 300.00

Lawn Care $ 1,000.00

Medical Supplies $ 500.00

Oxy / Acet Bottle Lease $ 400.00

Paint Supplies $ 125.00

Safety Equipment, Supplies $ 1,800.00

Sheet Metal Tooling $ 900.00

Sprinkler Quarterly Checks $ 1,800.00

Tool Overhaul $ 9,000.00

Tug (North Western 120) (Older Tug) Upgrade Front Axel 1 $ 4,000.00

Waste Service Safety Kleen $ 6,400.00

Waste Battery Disposal $ 650.00

Work Shoes $ 1,800.00

Total $ 133,342.00

NOTE:

Phase II Construction $ 750,000.00

39

Spare Parts Inventory

• Small dollar items expensed when purchased

• Larger dollar items capitalized on balance sheet as a pre-paid

expense then begin depreciating when installed, but difficult to

keep track of old and replacement parts so many companies

disregard and immediately expense.


Aircraft Budgeting – Expenses


41

FALCON 900EX N711AG

Consolidated Line Item Expense

($M)

JAN FEB MAR APR TOTAL

Plan Plan Plan Plan Plan

- - - - -

Salaries & Fringe 57 57 59 59 704

- - - - -

Total Compensation 57 57 59 59 704

- - - - -

Insurance 33 -- -- 33 174

T & E 17 17 17 17 204

Memberships/Subscriptions 2 1 2 2 22

Printing/Supplies/Postage 1 -- -- -- 4

depreciation / aircraft 118 118 118 118 1,416

depreciation / furniture & equipment --

42

aircraft scheduled maintenance 26 12 12 22 181

engine overhaul expense / reserve 29 29 29 30 350

communications expense 2 2 2 2 24

training 9 8 9 9 105

aircraft fuel 43 43 43 43 516

a/c landing & handling 20 20 20 20 240

food & catering 4 4 4 4 48

All Other Expense 4 4 4 4 48

- - - - -

Total Other Operating 308 258 260 304 3,332

- - - - -

Total Expenses 365 315 319 363 4,036

= = = = =

43

MAINTENANCE DEPARTMENT


($M)

JAN FEB MAR TOTAL

Plan Plan Plan Plan

Salaries & Fringe 130 130 150 1,760

Total Compensation 130 130 150 1,760

T & E 2 2 2 24

Memberships/Subscriptions --

Printing/Supplies/Postage 1 1 1 12

depreciation / furniture & equipment 4 4 4 48

aircraft scheduled maintenance 4 4 4 48

training 10 -- 10 90

All Other Expense 3 3 3 36

Total Other Operating 24 14 24 258

Total Expenses 154 144 174 2,018

direct staff 10 10 10 10

fte 13 13 13 13

44

HANGAR EXPENSE


($M)

JAN FEB MAR TOTAL

Plan Plan Plan Plan

- - - -

- - - -

Total Compensation -- -- -- --

- - - -

Premises - rent & TAXES 49 32 32 418

premises - depreciation 30 30 30 360

premises - expenses 44 7 23 231

depreciation / furniture & equipment 5 5 5 60

communications expense 7 7 7 84

45

All Other Expense 5 5 5 60

- - - -

Total Other Operating 140 86 102 1,213

- - - -

Total Expenses 140 86 102 1,213

= = = =

cost of funds (7) (8) (8) (107)

- - - -

total revenue (7) (8) (8) (107)

end of period assets 3,305 3,270 3,235 2,920

Monthly Interest rates 0.2150% 0.2350% 0.2433%

46

Understanding the IRS’s

Position on Capitalizing vs.

Expensing Heavy Maintenance

• IRS auditor’s mission is to generate taxes.

• In issues of capitalizing vs. expensing for tax purposes, IRS

will tend to opt for capitalizing

Alan Goldstein Live NBAA Webinar June 19, 2012

Expensing and Capitalization Guidance • Revenue Ruling 2001-4 addressed treatment of costs of a “heavy

maintenance visit” (HMV) that would reoccur several times over the

useful life of a commercial aircraft

– Included removal of engines, landing gear and interior, repainting,

addressing service bulletins and airworthiness directives, extensive

repair and replacement of minor parts “for the purpose of preventing

deterioration of the inherent safety and reliability levels”

– Three scenarios:

• HMV but no material upgrade, addition or replacement of major

structural component = expense

• HMV + replacement of significant number of skin panels to

address severe corrosion = panel costs capitalized (materially

added to the value) and other costs expensed

• HMV with extensive work to extend useful life = all capital

expenditures. Work constituted a “restoration”. Done in

conjunction with replacement of major components as part of a

“plan of rehabilitation” 47


General Rules for Expensing and

Capitalization of Repair Costs

• The cost of “incidental repairs” which do not materially increase

the value of the aircraft or substantially prolong its life, but just

keep it in “ordinary efficient operating condition” can be

expensed (IRS Reg. §1.162-4)

• The cost of repairs which add to the value of the aircraft,

substantially prolong its useful life or adapt it to a different use

must be capitalized (IRS Reg. §1.263(A)-1)

• The above concepts seem straightforward, but create challenges

when applied to the complex maintenance requirements of

aircraft

– Example: An engine shop visit (ESV) will be repeated multiple times

over the useful life of an aircraft, but each time the resulting repair

work can be quite substantial and expensive

48

Jeff Towers Live NBAA Webinar May 8, 2012

Expensing and Capitalization Guidance

• The court in the FedEx case concluded that the first 3 factors

were satisfied and even though the engines were sometimes

removed for servicing, that wasn’t sufficient for the engine by

itself to be treated as the relevant unit of property

• Court then looked at whether the ESV repairs were “incidental

repairs” that could be expensed or whether the costs should be

capitalized

• Relies on the “Plainfield-Union” test – if a repair merely restores

an aircraft to its condition after the last ESV and does not

increase the value, usefulness or life of the aircraft the cost is

deductable as an expense

49



• FedEx Case involved ESVs in which engines were swapped out

with a temporary replacements

• Court looked at whether the entire aircraft or only the engine

should be the focus in deciding whether a repair materially adds

to the value or appreciably prolongs the life – four factors:

– Does the taxpayer and the industry treat the engine as part of

the aircraft for regulatory, market and accounting purposes?

– Is the economic useful life of the engine coextensive with that

of the aircraft?

– Can the engine and the aircraft function without the other?

– Can and is the engine maintained while affixed to the

aircraft?

50



• IRS issued proposed and temporary regulations in December

2011 replacing the proposed regulations from 2008

• Components are treated as one unit of property for the purpose

of determining whether repair costs should be expensed or

capitalized if they are “functionally interdependent”

• Regulations include a “safe harbor” for routine maintenance

– The cost of repairs which taxpayer reasonably expects to

perform more than once during the class life (6 or 12 years

for business aircraft) to keep property in “ordinarily efficient

operating condition” are expensed

51



• Exceptions to routine maintenance safe harbor

– Property has “deteriorated to a state of disrepair where it is

no longer functional for its intended use”

– If costs are incurred by taxpayer which relate to a prior

owner’s use, then those costs are not subject to the safe

harbor and must be capitalized if the repair constitutes a

“betterment”

• Ameliorates a material condition or defect that existed

prior to taxpayer’s acquisition or

• Results in a material addition or

• Results in a material increase in capacity

52


53

Airframe Maintenance Expense:

Revenue Ruling 2001-4; Rules for

deducting costs of heavy maintenance

visit (HMV):

• Performance of HMV necessary to comply with FAA directive, that is not material upgrade, or replacement of major component, may be expensed.

• Additional work materially adding to the value of the airframe must be capitalized

• IRS states “Plan of Rehabilitation Doctrine” – implies that improvements to extend the life of the airframe must be capitalized.


54

Ingram Industries,

TCM 2000-323:

IRS permitted taxpayer a current deduction for the costs of

extensive scheduled maintenance of the engines of its fleet of

the tugboats


55

Engine Maintenance Expenses: IRS

TAM 9618004; states that “major

inspections” may not be expensed, but

treated as capitalized and depreciated

over their useful life.

• Example IRS used was a hot section.

• IRS position was that the inspections resulted in

substantial increase in the value & life of the engine.

• IRS said it was more in nature of capital expenditure.

• Although not binding on other taxpayer’s TAM

indicates IRS’s position on engine maintenance.


SALES TAX

• Imposed at the point of sale

• Tax rate can range from 2-10% of purchase price

• Many sales tax friendly states:

– Oregon – no sales tax

– New Hampshire – no sales tax

– Montana – no sales tax

– Connecticut – exemption for aircraft with maximum takeoff weight of

6,000 pounds or more

– Massachusetts – blanket exemption for aircraft

– Rhode Island – blanket exemption for aircraft

56


USE TAX

• Applies to property stored, used or consumed in the state

• Sales and use taxes are mutually exclusive

• Use tax rate = sales tax rate

• Tax rate depends on where aircraft is habitually situated

• Use tax can be assessed by more than one state

57


EXEMPTIONS

• Resale exemption

• Commercial exemption

– California – separate exemption for interstate commerce

and common carrier

– Maryland – interstate commerce

– Kentucky, Georgia and Nebraska – combine interstate commerce

and common carrier requirements

58


EXEMPTIONS

• Commercial exemption (cont’d)

– Nevada – Only Part 121 operators

– New York – Limited to aircraft used primarily to transport persons or

property for hire and/or used by aircraft purchaser to transport

tangible personal property in the conduct of its business.

Transportation services to affiliates don’t count in the “primarily

used” calculations for this exemption.

• Related party exemption

• Occasional sale exemption

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DOCUMENTATION FOR EXEMPTIONS

• General Documents Required

– Fully executed aircraft purchase agreement

– Aircraft bill of sale

– Aircraft delivery receipt

– Flight Logs

– Maintenance Logs

– Insurance Policy

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WATCH OUT FOR THE FOLLOWING

• Taking delivery in a sales tax free state does not mean you have

no use tax liability

• Being assessed use tax in one state doesn’t

mean it won’t happen again in another state

• Corporations can be residents of more than

one state and owe use tax in multiple states

• Registration of aircraft in sales tax friendly state will not stop

other states from assessing use tax

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Questions for Today’s Presenter?

Live NBAA Webinar June 19, 2012

Alan Goldstein Citigroup Executive Services

79 Tower Road White Plains, NY 10604 phone: 212-559-4812

fax: 212-793-0370 [email protected]

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