There's a bill which is
now through the House.
It is now with the Senate.
That bill, as it's currently drafted,
would bring back 100% bonus depreciation.
Easiest way we can illustrate this is if
a taxpayer goes out and
buys a $10 million aircraft
right now and we have 40% bonus
depreciation, they get to
take a $4 million deduction.
Year one.
If this new bill passes, they can
depreciate the full $10
million basis in the plane right
away in year one.
Nice.
So the tax savings is
substantially higher in year one.
Welcome to Own the Jet by Aspen Aero
Group, where we share
perspectives from some of the
leading voices in private jet ownership
and business aviation.
I'm your host, Derek Savage, along with
my co-host, Jason Spoor,
president of Aspen Aero
Group.
Our guest today is KJ McCarter from
Aviation Tax Consultants.
KJ specializes in tax planning for
private jet owners and
companies, helping clients
maximize their deductions
and minimize their liability.
Join us as we dive deep into the
mechanics, mindset, and moments that
define jet ownership.
And together, we'll learn
what it takes to own the jet.
Well thanks for joining us, KJ.
Yeah, absolutely.
Thank you guys for having me.
So can you tell me a little bit about why
somebody would need to reach
out to an aviation-specific
CPA?
I'm playing the role of a rich guy.
I'm going to buy a jet.
I have a CPA.
Why do I need to have
somebody that's aviation-specific?
Excellent question.
And the answer is this area of the tax
code is very nuanced and
specific just to aircraft.
So no matter how good your normal CPA is,
they probably haven't
dealt with any or very
many aircraft before.
So they may not be familiar with, one,
the sales and use tax
planning involved with an
aircraft transaction, but especially the
income tax planning involved with an
aircraft transaction.
Because aircraft are different than
another asset that a
business owner has purchased
in the past.
They can be used for personal use.
So when a business owner buys a
construction crane, that's
relatively straightforward to
account for.
You can't use a
construction crane for fun, right?
Right.
But a plane.
Well, I don't know.
I shouldn't say that.
I'll take on that challenge.
But in aircraft, there's certainly a
personal use element to it.
So it's different than other assets that
CPA may have accounted for.
And that's where our
expertise can be really valuable.
You almost can't have one
just for business, right?
I mean, you've got to
do something with it.
Right.
Yeah.
Almost all of our clients will have some
personal use for the aircraft.
And that's actually a common
misconception or a common
question that we get is, if I
buy this aircraft and I put it in my
business, do I have to fly
100% of the time for business?
Or can I take a
vacation flight with the plane?
Because that's the way
they look at cars, right?
They're just like, hey, how
much of this is business use?
How do you log your miles?
All that stuff.
Yep.
And with the plane,
it's similar to a car.
It can be prorated.
And the IRS actually gives us specific
rules to follow for how
to calculate what should
be deductible and what should not be
deductible based on that
business versus entertainment
use breakdown.
So you absolutely can use the plane for
personal and own it in your business.
What if you're a public company?
Public company, those rules can vary.
So it's important that they
talk to their tax advisors.
We mostly deal with non-public companies
in our practice, but
the rule set is different
there.
What are some things that if I'm owning a
jet, or if I'm
planning on buying a jet, what
are some things that I need to know about
the tax implications of that?
Because we were talking earlier about
some stuff where it's
like, where you do the thing
makes a difference and
timing makes a difference.
There's all kinds of potential landmines
that someone like me
would not know about.
Yep.
Yeah.
So the high level topics to be evaluated
before an aircraft
transaction, and that's a key
point.
This should be done before
you close on the aircraft.
Optimally well ahead of closing, but
closing location matters.
So the aircraft needs to be sitting in a
sales tax friendly
location when closing occurs.
There's a number of states
that can meet that criteria.
But it's on a state by state basis.
State by state basis, correct.
Based on that state's laws.
Yes, based on that state's laws.
There's some states that don't have sales
and use tax, so those can work well.
There's other states that have what we
call a flyway
exemption, meaning you can close
there, pick up the plane and leave.
And because you're not basing the plane
there, using the plane
there, they don't impose sales
tax on that transaction.
There's a lot of states
that have that exemption.
So closing location does matter, but the
more, not important,
but typically a little bit
more involved part of the planning is
called use tax planning.
And that concept is when the plane
returns home to where
it's going to be base hanger
and utilized, that state can impose use
tax on the aircraft.
And use tax is kind of
brother sister with sales tax.
It's that one time upfront tax on the
purchase price of the plane.
So like a California base buyer, for
example, if they bought a
plane and they closed in
Montana, that's great.
Montana doesn't have sales tax, but when
they bring the plane back
to California, California
would like to impose
use tax on the aircraft.
So roughly 10% typically upfront on the
purchase price of the
aircraft, and that can catch
a lot of buyers off guard.
So it's very important that buyers
understand, even if you
close in a sales tax friendly
spot, you still have a use tax obligation
unless you meet some sort of exemption.
What kind of thing would you have to do
to meet an exemption?
Varies widely from state to state.
So California, for example, and this is
unique to California, they
have what we call an interstate
commerce exemption.
It's one of the main exemptions that
taxpayers can potentially
qualify for that involves
utilizing the aircraft for
out of state business use.
Every state is different though.
Texas has its own exemptions.
Florida has its own exemptions.
The most important thing that the buyer
needs to do is connect
with the aviation tax planner
to explain to them, "Hey,
here's the plane I'm buying.
I'm going to base it in this state or
these states if they're
basing it in multiple states
and come up with a game plan."
And this goes back to what
we were discussing about.
The buyer already has their normal CPA,
but their normal CPA
probably doesn't know about
the sales and use tax exemptions for
aircraft in all 50 states.
So that's part of the
value that we can bring.
Jason, you work in the
brokerage of aircraft, of jets.
What are some things that you'd be like,
"Oh, shit, we can't land
here and do business here,"
that you'd want to call KJ
and make sure that that was-
The biggest is the closing.
We want to make sure that the client, the
buyer, is closing
that airplane in a state
that is going to be good for them.
And that's where he comes in to say,
"Okay, looking at their
accounting and how the taxes
work, we would like to close in Montana."
To be clear too, that doesn't mean that
the buyer has to try to
track down a plane that's
currently in a tax-friendly state.
Well, because I know that's what I'm
like, "Okay, if I'm in
Dallas, do I only shop for
planes in Montana now?"
Yeah.
Any planes are in Montana.
Go ahead, KJ, the plane.
Yeah, so the aircraft can be anywhere.
And really, when we're determining where
the aircraft should be
positioned when closing
occurs, we'll actually base that on where
it's going for its
pre-buy inspection typically.
Okay.
So we want to pick the most operationally
convenient spot that
is still tax-friendly.
So let's say the buyer tracks down a
plane that they'd like to
acquire, and it's sitting
in a state that doesn't have an exemption
from sales tax, and the
pre-purchase inspection
is going to occur there as well.
That's fine.
The aircraft just needs to be
repositioned before closing would occur.
Okay, I'm going to test your knowledge.
Oklahoma, good place or bad place?
It depends.
So they have a flyaway exemption, but the
aircraft has to be
above a certain purchase
price in order for that
flyaway exemption to apply.
Okay, lightning round.
Let's keep going.
Michigan.
Michigan has a flyaway exemption.
However, both parties need to be
out-of-state parties.
So its flyaway exemption is a little bit
more limited than other states.
California.
California has a flyaway exemption.
However, one of its requirements is that
the aircraft cannot
come back to California for
12 months following closing.
So generally, we prefer not to use it.
We want to leave that
option open for the taxpayer.
This guy's good.
Yeah, we did a lot of practice.
Do I care as much if I'm selling it?
Do these things affect me?
Good question.
Generally, the obligation for
sales tax falls on the buyer.
So it's not generally
not the seller's problem.
However, in some cases it can be,
especially if the seller
has a dealer's license or a
sales tax account.
Let's say they live in Florida and they
have a Florida sales tax account.
They may have obligation to collect
Florida sales tax from
the buyer when they sell it
to them unless the buyer presents them
with evidence of an exemption.
So sellers do need to be aware of that.
They need to make sure they don't have
some obligation to collect.
If they do collect evidence from the
buyer of a sales tax
exemption being met, but generally
it falls on the buyer.
Gotcha.
Jason, you had something?
Moving into depreciation.
Yeah.
So exciting news on that front is there's
a bill, which is now through the House.
It is now with the Senate.
That bill, as it's currently drafted,
would bring back 100%
bonus depreciation from January
20th, 2025 through 2029 if purchased
after that date, on or
after that date through
2029, which currently we
have 40% bonus depreciation.
So it's a huge jump.
And why that matters is one, the tax
savings that that provides
in year one for an aircraft
purchaser is far more substantial, 60%
more substantial almost.
So easiest way we can illustrate this is
if a taxpayer goes out
and buys a $10 million
aircraft right now, and we have 40% bonus
depreciation, they
get to take a $4 million
deduction.
Year one.
Year one plus the first
year of five year maker.
So a little bit over 40%.
If this new bill passes, they can
depreciate the full $10
million basis in the plane right
away in year one.
So the tax savings is
substantially higher in year one.
Now Jason, with your business, you talk
about once a plane has
been depreciated, that might
be an impetus to sell.
So what does that mean in terms of the
velocity of people potentially upgrading?
If they can, right.
If they can depreciate the entire thing
year one, and then the
next year they're like,
you know what, we had another good year.
What else is out there?
Yep.
Yeah.
It sounds like to me that this is going
to open up the floodgates
on aviation transactions.
Yeah.
It should incentivize some first time
buyers to come into the
space and get a substantial
tax benefit in 2025, but also it can free
up current aircraft owners to upgrade.
And the reason that it may do that is we
don't have like kind
exchange for aircraft right
now, like we have with real estate.
So when you sell, let's say an aircraft
owner owns a $10 million
aircraft, and they sell
it for $10 million.
They have to recognize, and let's assume
they fully depreciated
the plane, so their base
is in a zero.
They have $10 million of
income from that sale in 2025.
When we have 40% bonus depreciation, when
they go and buy their
next plane, let's say
that's also a $10 million aircraft, and
they take 40% bonus,
they just got a $4 million
deduction, but that cannot fully offset
the $10 million of
ordinary income from the sale,
the previous aircraft.
We have $6 million
leftover is the napkin math.
We have to pay tax on.
That's suboptimal, obviously.
When we get 100% bonus depreciation back,
now we can take the
full $10 million deduction
on the next aircraft in 2025 and offset
the $10 million of
income from the sale of the
previous aircraft, those net out.
That's zero.
You do that in the same year, right?
In the same tax year.
Right.
Okay.
So that's the way the
game is played, apparently.
Nice.
Now there's the way the
bill is written current.
That expires.
So can you talk about that?
Yeah.
As the bill's currently drafted, it's set
to expire at the end of 2029.
Now things may change before this bill is
enacted, before it gets
to the Senate, or they may
change in a couple of years.
There may be a new tax bill, but for now,
that's set to expire in 2029.
I mean, it sounds like there hasn't been
a better time in a little
while to do this outside
of like maybe like
just post COVID, right?
Or everybody was buying and selling.
But this sounds like a good
time to be good at about it.
Yeah, absolutely.
It's certainly not a certainty that this
bill gets through, but
there's a ton of optimism
in our space that 100% bonus in some way,
shape, or form will be back for 2025.
So it's a good climate.
So if I were a shady individual, I'm not
saying I am, but if I
were, and I wanted to avoid
painting taxes altogether, I don't have
to try to do anything shady.
I just have to wait.
Just wait.
Is that kind of what it is?
Yeah, if you want certainty that you can
take 100% bonus in 2025,
if you want 100% certainty,
you would have to wait to acquire until
this bill gets through.
And the latest that I've heard is the
target date to get this
enacted would be July or
August.
But Jason can speak
more to this than I can.
If you wait until September and then you
say, oh, the bill got
through, let's get started
with an aircraft acquisition,
you're very late to the game.
Yeah, probably not going to happen.
It's probably not going to happen in
2025, or at a minimum, it'll be a rush.
So it's important to get started now with
an aircraft
acquisition if you're hoping to
close before the end of 2025.
Is there anything that might go awry with
any of the stuff where, you mentioned all
the potentials here, but what does
somebody's situation have to
be in order to take maximum
advantage of this?
Do they have to have a
bunch of cash on hand?
Do they have to have a
certain asset mix, whatever?
Generally, they need to be a business
owner, and they need to
be able to fly the plane
around for business use in relation to
that business that they own.
Gotcha.
So the slam dunk client fact pattern for
us would be a
construction company or a consulting
company that needs to acquire an aircraft
to fly around and
meet with its clients or
go to its job sites, and it's using the
plane as an internal
business use tool to facilitate
earning its revenues.
So the plane is not a
profit center for them.
They're not leasing it out to their
portfolio of companies.
They're just using the plane as an
internal tool to get around and
facilitate their dealmaking.
So if I own Acme Construction Company,
does Acme Construction
Company own the plane, or
is it plane co owns the plane, and then
the construction company
leases it off of plane?
What does that look like?
I know there's a lot of
shell games that you can play.
Excellent question, and the answer
depends on the sales and
use tax planning involved,
typically.
So from an income tax perspective, if
Acme is using the plane for
its business use, generally,
Acme owning the plane could actually work
from an income tax perspective.
It can be as simple as that.
However, you'll very seldom see that
structure be used in practice.
For a number of reasons, some are not tax
related, but the main
tax one is many times
for sales and use tax planning purposes,
we need a separate
entity to own the aircraft
so that it can serve as the lessor of the
aircraft and lease
the plane from plane co
to the construction company.
The reason why that matters is sales tax
can in some states be
paid on lease revenue rather
than up front on the
purchase price of the plane.
Oh, nice.
So take Indiana, for
example, perfect example.
If you went out and bought a $10 million
aircraft in Indiana,
let's say you didn't work with
the tax advisor at all, you
just went out and bought it.
Indiana would impose
7% use tax on the plane.
So that would be $700,000 tax liability
on a $10 million aircraft.
With proper planning, the aircraft can be
leased from plane co
to construction co in
this example, that 7% can be paid over
time on lease revenue.
Is plane co like in Montana or Delaware?
No, plane co can be in Indiana LLC.
It could be a Montana
LLC or Delaware LLC.
It actually doesn't
really impact what we're doing.
So sometimes our clients will have out of
state LLCs for some
non-tax reason, but for
tax purposes, it can be an Indiana LLC.
That entity will have an
Indiana sales tax account.
So it'll be registered here anyway.
Right.
And how much just napkin math, how much
savings could you expect just by doing
the right paperwork,
having the right timing, consulting with
someone such as yourself,
that would be able to help
understand all of that.
Yeah, generally in Indiana,
it's about a 13 year break even.
Yeah.
So the amount of sales tax you would have
paid on lease revenue
compared to what you
would have paid upfront will
be the same after 13 years.
So about you pay about one 13th of
700,000 per year in
sales tax on lease revenue.
And the real beauty of that in Indiana
and states like Indiana
is if you sell the plane
after four years, for example, then
you've paid for 13th of
what you would have paid
upfront.
Right.
So remaining 9th or 13th stays with you
when you sell the aircraft.
The bottom line from my perspective, what
I'm hearing is if you are
even remotely interested
in owning a jet, you need to have this
stuff figured out prior
to even talking to anybody
about a transaction.
Is that how far in advance do we need to?
Really the earlier the better.
Yeah.
To get started with tax planning and at
least kind of table that.
If all the tax answers are good, then
they can set that aside
and we can revisit three
months out of closing.
But it's good to get those questions
addressed well ahead of closing.
One so we have a game plan in place when
we do find the plane we
want to buy and we can
move quickly.
But also if there's something that would
prohibit them from taking
income tax deductions on
the plane, they probably want to know
that sooner rather than later.
So best to get those
answers as early as possible.
And we're always happy to have
consultations with the
way that our firm works.
We do calls early on in that process.
We don't need to be engaged two years
before we buy a plane or
if we're just exploring
the opportunity to buy a plane.
We have those called all the time.
We wrote kind of an open book with
answering questions so
that buyers know if they can
take deductions on the plane.
Nice.
And Jason as a broker, that's something
that's top of mind for you
at all times is like, how
do I make sure that my client is getting
the best transaction?
Right?
Absolutely.
So you would reach out early on in the
conversation with your
client about the next stuff.
Yeah, that and financing.
But steering it back towards the part
135, part 91 world as
far as setup and structure.
What are your thoughts on that
as far as how to go about it?
Yeah.
So from a tax perspective, if it's just
the taxpayer flying
around in their own aircraft,
that flight being operated under part 91
or part 135 won't
change anything from a tax
perspective on the income tax side.
In a few states, there may be some
personal property tax benefits of
operating under part
135.
But generally speaking, it's the same if
it's the taxpayer
flying on their own aircraft.
Now if the aircraft is being leased to a
charter company, for
example, for charter to the public,
that's business use, of course, but
that's treated a little
bit differently than internal
business use by the
taxpayer for their own business.
So certainly if that's a part of the game
plan for the aircraft
purchaser, we need to
discuss that ahead of purchase as well.
And that can open the door to some sales
and use tax exemptions as well.
So companies like QuarterShare, so you
own a quarter of the
airplane, they're paying
tax on that?
Well it kind of
depends on the fact pattern.
But generally speaking, if we go out and
we buy a fractional
interest in an aircraft,
we can derive a similar income tax
benefit to if we bought an
aircraft for the same purchase
price.
So let's say we buy a share for $2
million instead of buying
a $2 million whole aircraft
and we fly at 100% for business, both of
them, then we get the
same depreciation benefit
either way.
The sales and use tax planning involved
typically is, there's less
for a fractional interest
than a whole aircraft ownership.
Makes sense.
Awesome.
So how can people reach out to you if
they are in the process
of like, hey, I really
think I'm ready to start the conversation
of owning a jet and
this is something that
I need to be thinking about potentially
setting up my own plane co or whatever.
Yeah.
Our website is aviation tax consultants.
My email is kj at
aviationtaxconsultants.com.
Reach out any time.
Like I said, we're
happy to hop on a call.
We don't have an hourly
fee or anything like that.
We'll get on the phone.
We'll answer your questions.
If it makes sense to engage
us, we can talk about that.
But we're happy to be a resource.
We'll definitely have you back.
There's like a ton of other questions.
I don't know.
But it's like, I feel like we're abusing
your knowledge at this point.
I'd love to come back anytime.
Awesome.
Well, thank you.
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