How Private Jets Self-Liquidate for High Net Worth Individuals and Companies: ‘the tax-efficient jet card’
Are you an action taker who values personal freedom? Are you tired of paying retail and want a better solution to fly privately? Do you have the ability to purchase, cross-collateralize or finance a low seven-figure asset?
Private jet ownership is an investment in yourself. Your business. Your family. It’s the single most satisfying purchase of your life.
We may be able to show you how this investment can “self liquidate” without you being liable for expenses like maintenance and pilots.
New thinking and new products give you life-changing access, cost predictability, and the opportunity for tax-free monthly profit distributions on money-making flying machines.
In today’s environment of:
– Low acquisition cost of certain pre-owned jets,
– High charter monetization, and
– Favorable tax benefits (bonus depreciation)
Jets operated in this system for six to ten years and then salvaged typically realize significant tax and financial benefits.
What do we do? One product is the Operator Lease. You buy (or finance) a jet and lease it to a nationwide charter operator for a combination of Money and Miles (a monthly lease payment made to you, and no-cost flight time for you). The operator is responsible for the aircraft profit and loss. At a minimum, your profit distributions are offset by asset depreciation.
The “Featured Opportunities” in this issue – Falcon 900EX, Falcon 50, and Citation Ultra – represent live opportunities to take command with a nationwide floating fleet and immediately enjoy the benefits of ownership.
The Falcon 900EX in particular is an outstanding investment opportunity.
If you’d like to discuss how to put these ideas into action, please contact me directly.
Justin Sullivan, Boston MA 617-943-5387 justin@PrivateFLITE.com
By Richard Rubin and Andrew Tangel
Jamie Knorring, president of commercial shelving maker B-O-F Corp. in the Chicago area, is planning to buy a used factory machine to make clamps as part of a broader plan to boost worker productivity.
Making workers more efficient isn’t the only factor that makes it a good purchase for him. Buying the equipment can also lower his tax bill.
The new tax law allows firms to claim an immediate 100% deduction when they buy an asset, including purchases of used equipment that have already been written off by previous owners.
“It sweetens the deal,” Mr. Knorring said of the tax benefits of buying the equipment. The company, which has about 70 employees and took in revenue last year of approximately $20 million, is planning to buy other equipment including a welding robot, purchases made easier to justify given the new tax incentive, he said.
Tax planners say the market for used equipment—including rail cars, airplanes and industrial machines—is likely to heat up in the months ahead as firms try to take advantage of changes in the tax law. It could mean a shuffling of assets by companies purely for tax reasons and mergers and acquisitions that exploit new tax edges.
Before now, smaller companies could fully deduct purchases of used equipment, but larger firms had to spread those deductions over many years, and faster depreciation schedules applied only to new assets.
Under the new law, one company’s gently worn asset could be worth more in another company’s hands. That situation creates an incentive for deals that get tax deductions to companies that can use them and income to companies that already have lower tax rates.
Tax lawyers say they are flagging the possibilities to clients.
“We might well see the development of a kind of swap meet for slightly depreciated business assets,” Chris Sanchirico, a tax law professor at the University of Pennsylvania.
Because the law is still new, the market hasn’t yet caught fire.
Tax lawyers said one asset class that could get attention is airplanes.
“It seems like another of these things that will be industry-specific and it will be relatively easy in some cases based on the idiosyncratic character of certain industries and might be harder or impossible in others,” said Ari Glogower, a tax law professor at Ohio State University.
For now, the swapping and leasing markets are quiet as lawyers work through the possibilities.
“I haven’t seen a groundswell of sale-leasebacks of used assets but I think we are going to see that type of thing,” said David Burton, a tax lawyer at Mayer Brown LLP in New York who specializes in lease transactions. “It’s coming. It’s all coming.”
Consider a case of a company that borrowed money to buy a $10 million airplane that is now worth $9 million. For tax purposes, depreciation deductions have already lowered its value to about $4 million. The tax law’s new limits on business interest also limit the company’s ability to deduct its interest costs.
The company might enter into a sale-leaseback deal that replaces the borrowing arrangement with a leasing deal that shares the tax benefits between both firms.
A bank could buy the plane and take a full $10 million deduction on the aged plane right away. The company would owe taxes on its $5 million gain, but the new lease payments would be tax deductible for the airline, while the interest payments wouldn’t have been.
“The assets now in the hands of the buyer are worth more than they were in the hands of the seller,” said Eli Katz, a tax lawyer at Latham & Watkins LLP in New York.
The tax changes will likely accelerate purchases of new and used aircraft, said Michael Morgan, an investment banker at Burnham Sterling who advises airlines.
“It’s certainly going to be helpful on the margin and we’ll see more acquisition of aircraft because of this,” Mr. Morgan said.
Sale-leaseback deals and other transactions that take advantage of the new rules could also make sense in the rail and energy industries, tax lawyers said.
The Internal Revenue Service has sometimes looked askance at sale-leaseback transactions as tax shelters, depending on how they are structured, and has created an “obstacle course” of rules that businesses must traverse, Mr. Sanchirico said.
Randolph Smith, a national practice leader at Grant Thornton, LLP, said any transactions would likely have to meet a test for having a business reason other than tax avoidance.
Buying a private jet comes with a hefty price tag — but the new tax bill has made the extravagant purchase more appealing to some.
Private jet buyers can now write off the full amount of their new plane’s cost on their tax return, which applies to both new and pre-owned aircraft. That’s due to a policy change within the Administration’s 2017 Tax Cuts and Jobs Act that updated the US tax code to allow 100% bonus depreciation for items such as aircraft.
For the mega-wealthy of the world, this deduction accounts for much, if not all, of their millions in tax liability — meaning buying a new private jet could practically wipe out their tax bill in the year they buy it.
The new tax bill also addressed a technical clarification that now prevents operators of private charter flights from being charged with a tax that was originally designed for commercial flights.
The President— who has long owned his own plane— might also be making private jet ownership more appealing. In an interview with The New York Times, Steve Varsano, who owns The Jet Business— an aviation showroom and retailer that sells private corporate aircraft — said: “[Trump] is changing the optics of private aviation. He’s the mascot of private jets.”
The public may not view private jets quite so positively, however. Health and human services secretary Tom Price resigned in September after a bipartisan outrage for his use of private chartered flights to conduct government business.
The world’s richest people already spend $23 billion a year on private aviation, according to data from Wealth-X and Camper and Nicholson featured in a recent report from Coldwell Banker, but it’s possible that number will increase.
“This is a very generous depreciation offer and the market has been on the cusp of a turnaround for some time. Maybe this serves as one of the precipitating factors,” Richard Aboulafia, vice president and aviation industry analyst at Teal Group, recently told Business Insider’s Benjamin Zhang.
Can a prospective aircraft owner benefit from claiming 100 percent “bonus depreciation” even though the owner expects to fly the aircraft for personal use? Yes, with limitations and careful structuring under the Internal Revenue Code (IRC). However, in doing so, it is essential to harmonize potentially conflicting rules in the IRC with the Federal Aviation Regulations (FARs) and state law, including sales/use tax laws.
The Tax Cuts and Jobs Act of 2017, which became law on December 22, for the first time allows aircraft owners temporarily to take 50 percent or 100 percent bonus depreciation deductions on preowned aircraft. It also doubles the pre-existing 50 percent bonus depreciation to 100 percent of the cost of certain new aircraft.
A business taxpayer who owns an aircraft can take 100-percent bonus depreciation deductions under the IRC against gross income if it uses the aircraft in its trade or business or for production of income, including charter income.
The IRC allows certain owners to deduct depreciation from gross income by two methods. The first is straight-line depreciation created under the Alternative Depreciation System. This allows owners to take equal depreciation deductions each year of the “recovery period”—the years to fully write off aircraft. That is six years for aircraft operated under Part 91 and 12 years for aircraft operating under Part 135.
The other depreciation method is the Modified Accelerated Cost Recovery System (MACRS). MACRS allows an owner to write off its aircraft and certain helicopters in five years for Part 91 usage and seven years for Part 135 usage. An owner must qualify for MACRS to claim either 100 percent or 50 percent bonus depreciation.
IRC Section 280F prescribes that an aircraft must be “predominantly used in a qualified business use for any taxable year.” This deceptively simple idea presages complex rules about claiming depreciation deductions, including 100 percent bonus depreciation, on mixed personal and business use of aircraft.
Despite the best business planning, personal use inevitably happens.
When it does, owners must calculate the “entertainment di-sallowance percentage” attributable to their personal use—the portion of entertainment use relative to total flight time or hours.
I often hear prospective owners worry that their personal use might unravel the benefits of 100-percent bonus depreciation, but a special regulation allows an owner to elect and calculate the dis-allowance in year one on a straight-line basis, spreading out depreciation over six or 12 years.
Once an owner takes 100 percent bonus depreciation, there is no depreciation expense left to deduct starting in year two. As a result, if the owner elects straight-line, the disallowed deduction will be a much smaller amount and, correspondingly, the economic benefit of 100 percent bonus depreciation to the owner should be greater. This approach enables an owner to maximize tax savings and minimize the adverse effect of personal use on bonus depreciation.
With strong interest in tax benefits afforded by the tax law, potential purchasers might join committed ones and “pull the trigger” to acquire a new or preowned aircraft. If, in any aircraft purchase, the prospective owner properly structures its transaction to claim bonus depreciation consistent with the rules in the IRC, the FARs, and state tax laws, bonus depreciation should lower the owner’s cost of capital, increase its after-tax cash flow and reduce its federal tax bill. The value proposition seems obvious, but each owner must decide whether taking bonus depreciation when purchasing an aircraft is worth its while.
The author would like to thank Julianne Christensen, managing member of AeroCPA, LLC, for her extensive assistance on this story.
David G. Mayer is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton, LLP in Dallas, which handles worldwide private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing and financing, risk management, insurance, aircraft operations, hangar leasing and aircraft renovations. Mayer frequently represents high-wealth individuals and other aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at dmayer@shackelfordlaw.net, via LinkedIn or by telephone at (214) 780-1306.