+[Me]

One thing I learned in banking that persists today is how to catch up quickly. In banking, I had clients who would call me with an idea already baked the night before, and maybe even with a Letter of Intent (LOI) already struck. My job: get up to speed quickly and make sure that deal was structured to not just close but benefit the owner for years to come. 

Today, my job is similar. I receive an email that simply says “+[me]”, and whether it is real estate, a business, or an aircraft, getting up to speed to see the deal through is one aspect that makes my job so enjoyable. When it comes to aircraft, the price is usually set, the pictures have been taken for friends and family, and the avionics and powerplant confirmed. My tasks are the less exciting aspects that go with finance and asset management, the things often overlooked or mismanaged: ownership structures that balance privacy and depreciation, dry or wet leases, sales tax and fly-away exemptions, and charter offset arrangements with management companies.

Before you yawn and scroll away, here’s why these matter, without feeling like you just read a textbook. 

Ownership Structures: Privacy, Liability and Depreciation

One of the early decisions we start a conversation on is ownership. There is often a tendency to say “Oh, this can go in the LLC with the other one.” But most attorneys would tell you that an accident or issue with one asset in an entity may quickly become an issue for all of the assets in that entity. The clearest example of this is a judgment lien. Something happens in aircraft A, a lawsuit is filed, a summary judgment is awarded, and suddenly all of the assets in the entity are exposed. I saw this a lot during the years following the financial crisis. Working with our general counsel, we start by asking about the aircraft ownership entity. 

While none of this is meant to be legal or tax advice, we at FLYING Finance talk with hundreds of pilots each quarter and ownership is a common question. Remember the Taylor Swift airplane tracking debacle from a few years ago? You may not be as famous as Taylor Swift, but privacy is still a valid aim. In the piston world, we usually see the debate being whether to own an aircraft in your personal name or in a limited liability company, and how that LLC should be owned. Those that own businesses, real estate, or have owned aircraft before are often the ones that default to an LLC. It is what they know, what their general corporate attorney is most likely to recommend, and if they have the LLC registered through the attorney or another third-party agent, there are privacy benefits that just do not exist if the aircraft is titled in a personal name. 

Then add in the opportunity for bonus depreciation, now restored to 100%, and a clean limited liability company with a dry lease to the operating business and appropriate documentation of your flights and expense handling, and many pilots are ready to start a flight plan. 

Then there are those that want to do it the aviation way. Ask many aviation advisors, and you are likely to hear a preference for aircraft ownership trusts versus LLCs. Owners receive the privacy and bonus depreciation opportunities similar to an LLC, but avoid the arm’s length and self-dealing questions that may come with LLCs. In an aircraft owner trust, the third-party trustee registers and administers the trust for the beneficiary, which may be a business entity or an individual. Without getting too complicated with layers of trusts and LLCs, a trust setup with an operating company as the beneficiary passes the depreciation opportunity onto the operating company.  

In either the limited liability company or the aircraft owner trust case, the bonus depreciation is only eligible if the aircraft is actually used primarily for business purposes and the documentation shows the related expenses like the fuel and pilot(s) are being paid by the operating company, not the aircraft ownership trust or limited liability company holding the aircraft. That’s the tension. Folks do not always want to keep up with the records and the IRS may claim an illegal charter and disallow bonus depreciation if the paperwork doesn’t hold up. 

Dry or Wet Lease: Who Pays Who

Once ownership is settled, the next question is how the aircraft gets used when you’re not the one flying it. A dry lease hands over the aircraft alone, the lessee supplies the crew and operational control, and it’s treated very differently by the FAA than putting someone else in the left seat under your own certificate. A wet lease includes the crew, which usually means you’re operating under charter rules, with everything that brings: Part 135 oversight, insurance requirements, and a very different tax treatment on the transportation itself. 

For owners that have businesses to run, jobs to do, or real estate projects to manage, a lease by any other name, to paraphrase Shakespeare, may sound as sweet, and lead the romance of flying straight into a tragedy. 

One way we look at handling this, primarily for turboprops and jets, is through a management company, where the aircraft may be maintained and hangared with a management company, and even placed under a Part 135 charter for the management company to coordinate, including supplying the pilot, making it a wet lease with any third-party looking to charter the aircraft. The wet lease chartering activity may offset some of the fixed costs related to the aircraft, but keep in mind that the maintenance is going to come around faster than if you are the only one going up. 

Having the aircraft with a management company to provide limited charter operations does not disallow us from using a dry lease between related parties, where the aircraft entity is only receiving payment for direct use of the aircraft, and any pilot, fuel or other expenses are paid directly, including directly to a management company where the invoice is solely for those related expenses. 

It all depends on the mission for the aircraft, or missions, and how we need to come around the structuring to ensure all objectives, at closing and in the future are set up. For anyone considering this Part 91 with limited charter route, it is important to understand and document the expectation for how much charter activity you are allowing, how the scheduling will work, and what fee the management company is going to assess on the charter revenue for making sure all passengers fly safely and enjoyably. 

Sales Tax and Fly-Away Exemptions: Where the Money Actually Leaves the Deal

Once the ownership and mission are understood, the management company is engaged and expectations are set, we can begin thinking about how and where the closing and delivery will take place. If the closing requires financing, FLYING Finance is engaged to effectively communicate the mission(s), secure the loan structuring, and coordinate with the insurance and escrow title agencies the team speaks with every day. 

For closing, one of the often overlooked or underappreciated aspects is sales and use tax. Some states charge sales tax, some charge use tax, some have fly away exemptions, and some may try to charge you six months later when you visit. Understanding sales and use tax by state is why the Daher TBM team that recently took our own Jonathan Welsh up in the TBM 980 seems to always be coming from a delivery somewhere. Sales and use tax on an aircraft purchase can run into the hundreds of thousands of dollars, and it’s entirely a function of where you take delivery, where you base the aircraft, and how quickly you move it out of the taxing state. This last note is what is called a fly-away exemption, where a state may not charge sales tax for an aircraft purchased in the state, as long as the aircraft departs for its out-of-state home within a certain timeframe. 

While there are times where this focus can turn into a countrywide cross-country flight plan, let’s take, for example, a current transaction with a Tennessee resident purchasing a new aircraft from North Carolina. Buying in North Carolina has a $2,500 simple sales tax, and use in Tennessee has a 7 percent state sales and use tax, plus potential county and local taxes. Assuming a $1 million purchase price, the total tax bill could be around $100,000 using 2.25-2.75 percent for the county and local tax. If the transaction were in reverse, a North Carolina buyer purchasing an aircraft in Tennessee, the buyer could buy the aircraft and fly it out of Tennessee within 30 days under the Tennessee fly-away exemption, returning home to North Carolina with a total tax bill of $2,500. 

For those that live along a state border, understanding ad valorem taxes may also sway where the aircraft is hangared. Georgia charges ad valorem tax on personal property but personal aircraft in Tennessee do not have an annual tax. You may not be willing to move your residence just to save on sales and use tax, but an extra few minutes to get to the hangar may be worth tens of thousands of tax dollars each year. 

As with the paperwork for documenting flight use for bonus depreciation and the dry lease, keeping clean records may also help you stave off states like California and Florida that look for aircraft visiting shortly after an out-of-state purchase, and by shortly, I mean within 12 months. That family trip to Universal or Disney is expensive enough, without adding a use tax. 

The +[me] Moments

Whether it is an aircraft, real estate, or a new or expanding business venture, proper paperwork is like a preflight, never to be overlooked. We all know the value a complete set of logbooks provides for an aircraft, and the implications when pages go missing. The same level of attention applies to how and where you buy an aircraft. If you are debating between a Cirrus or a Diamond, an Epic E1000 or a Pilatus PC-12, or a CubCrafters and a Bearhawk, let us know. Send us the listing or spec sheet to + Flying Finance. We will get up to speed quickly, and you can focus on sharing those pictures and planning for that first rotation off the runway.