Aerlex Law Group’s comprehensive tax practice strategically addresses all aspects of the federal, state and local taxation issues that can arise in connection with the purchase, lease, use, sale and ownership of aircraft.
FEDERAL TAX ISSUES
Corporate structuring to satisfy IRS and FAA Considerations
Aerlex reviews an aircraft buyer’s proposed ownership structure to make certain it will comply with both the Federal Aviation Regulations and Internal Revenue Service (“IRS”) rules in order to avoid the creation of illegal “flight department companies” and minimize exposure to the assessment of federal excise tax. Our attorneys help clients develop the best plan to ensure that the ownership structure minimizes tax liabilities while, at the same time, maximizing tax advantages.
Aerlex attorneys review and/or draft aircraft purchase agreements to enable the acquisition to qualify for bonus depreciation, if available, applying their knowledge of the most current laws and opinions and rulings of the IRS. We consult with clients regarding the current availability of bonus depreciation for the property purchased, as well as guiding taxpayers on options for avoiding the recapture of depreciation previously taken. Aerlex can also monitor an owner’s aircraft usage on an annual basis to make certain the aircraft continues to qualify for depreciation and support the collection of documentation in preparation for potential audits by the IRS.
Personal Use of Aircraft and Limits on Deductibility
Use of a company aircraft by owners, directors, executives or other employees for personal or entertainment purposes may result in the reduction of allowable depreciation deductions unless alternative methods of transportation are considered. Aerlex attorneys will guide aircraft owners through the process of valuing non-business flights, using either the charter rate or Standard Industry Fare Level method, and consult with taxpayers on how to strategically limit personal use in order to minimize the impact of these limitations on deductibility.
Federal Excise Taxes
Both private and commercial aircraft operators need to pay federal excise tax (“FET”) on either the purchase of fuel or the transportation of persons or property for hire. In some instances, the only obligation for FET are the taxes “paid at the pump” (added to the cost of aviation fuel when it is purchased), but in other instances, taxpayers must collect and remit tax to the U.S. Treasury and file quarterly reports with the IRS. Aerlex attorneys can provide guidance on when FET should be collected and remitted and assist in the tax calculations. Aerlex can also advise clients on the most recent IRS opinions, including the IRS Chief Counsel Advice, issued February 15, 2012, which significantly expanded the application of the FET to management company contracts where aircraft are being operated for the private use of the aircraft owner.
IRS Audit Defense
In recent years, both federal and state revenue agencies have become increasingly aggressive in their pursuit of potentially taxable income from the use of aircraft. The IRS has initiated a formal audit program aimed specifically at aircraft. As a result, more taxpayers are being audited and deductions are being disallowed due to passive activity loss limitations, hobby loss rules and ordinary and necessary use restrictions on aircraft. Aerlex attorneys are experienced in responding to and defending IRS audits and can assist clients in properly documenting their flights and preemptively protecting themselves from future audits.
STATE AND LOCAL TAX ISSUES
Sales and Use Tax Exemptions
No one is more skilled than the Aerlex legal team when it comes to advising clients on how to legally avoid the imposition of both the California sales and use taxes on aircraft acquisitions through the use of various California exemptions, including the interstate commerce and common carrier exemptions. Aerlex will help clients identify exemptions that may be applicable to their particular situation and instruct them on how to properly record and collect the documentation needed to support exemption claims. Our services are most valuable when clients contact us prior to the date of delivery so that we help assure that no potential exemption is lost due to lack of knowledge or misguided actions. Aerlex also reviews the documents to be submitted to the California State Board of Equalization (“BOE”), prepares and submits the final package to the BOE and regularly communicates with the BOE’s tax representative until an exemption has been granted. Aerlex can also monitor the usage of aircraft on a monthly basis to determine the percentage of exempt use and detect potential problems early on in order to facilitate necessary changes in aircraft use of the aircraft to preserve the exemption.
Property Tax Appeals
Aerlex attorneys file dozens of property tax appeals every year on behalf of aircraft owners who disagree with the assessed value of their aircraft, as well as defending taxpayers before county assessment appeals boards throughout California. Even before the appeal process begins, Aerlex helps taxpayers in determining the fair market value of their aircraft, utilizing the services of expert appraisers from all over the country to make certain their aircraft was not overassessed. These appraisers can also provide comparables and other documentation needed to support an appeal based on decline in value. In addition, Aerlex analyzes the use of the aircraft to determine whether any further reductions in property tax can be achieved.
Sales, Use and Property Tax Audit Support
Because Aerlex specializes in California sales, use and property tax, our firm has the expertise to support taxpayers in audits by both California counties and the State BOE. Aerlex assists clients in the collection, review and submission of documents requested by the taxing authorities. Our expert knowledge with respect to the often complicated application of state tax laws has frequently resulted in the reduction or even the complete elimination of property tax escape assessments and use tax liabilities previously imposed.