PRIVATE WEALTH MATTERS
That Shiny New Jet – the Ultimate Toy!
Feb 11, 2016
That Shiny New Jet – the Ultimate Toy!
This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche.
A number of years ago, when I was employed as a manager at another accounting firm, I worked for a partner who used to say: “The dumbest thing a rich person can do is buy an airplane!” He was convinced that, for all but those at the tippy-tippy top of the income pyramid, the 1% of the 1%, if you will, an airplane would be a waste of money. And, back then he may have been right.
Of course, that was before 9/11 turned commercial flying into a daily nightmare whereby full-fare paying first and business class travelers (as well as bargain basement, standby student joyriders) are presumed potential terrorists and have to partially disrobe and unpack to prove otherwise. What was a barely tolerable experience before 9/11 is now basically unbearable.
It was also before the “1%” added a few more zero’s to its average wealth. Today’s wealthy are very wealthy and, while cost is always important, convenience and quality of experience is generally far more important. Taking the hassle and the relative cost into consideration and suddenly that private plane doesn’t seem so expensive.
Consider this – Commercial airlines fly to about 550 airports in this country; general aviation has almost 10 times that number at its disposal! You’re the boss in your own private plane, not the petulant overworked, underpaid flight attendant. And best of all, you travel on your own schedule, without commercial aviation’s strip search and shoe removal rituals. It does sound good.
Of course there is a huge, huge difference between the Cessna 150 that my dad used to own, fly and maintain himself, and the eleven jets (including a Boeing 707) that John Travolta owns. Like everything else in life, you can drive a Hyundai or a Ferrari and they will both get you there but one is just a car and the other is…..A CAR!
So, just in case you are thinking about starting your own personal airline anytime soon, here are a few practical things to consider. And, of course, if you do decide to take the plunge, please, please, please do that proverbial deep dive to quantify and qualify your potential purchase.
- Why are you buying a plane? Is it strictly for personal use or is there a business component? If there is a business component, how much of one is there? Can costs be shared in an efficient and equitable manner?
- If business usage is a possibility, will it be “private” business usage or “public” business usage? In other words, will the primary use be personal, subjecting the plane to the more relaxed Federal Aviation Regulations (FAR) Part 91 or will the primary use be that of a common carrier, subjecting the plane, its maintenance schedule and pilot competence and training to the more stringent rules of Part 135?
- How are you going to manage the risk? What form of ownership works best – corporate, LLC? If you will be sharing ownership, how will that be structured? (Hint, hint – it will impact your insurance premiums.) And, of course it is a given that you will need to use a specialty insurer to properly underwrite the risk.
- How important is it for you to have an airplane standing by at all times to shuttle you wherever you have to go? Remember, it’s not just the cost of the machine; it’s the people on your payroll who have to fly the darn thing! But for the control freak, ownership really does have its privileges.
- Will a fractional ownership arrangement (i.e., NetJets) provide what you need at a fraction of the cost? Sometimes, a “timeshare” is ideal – lots of flexibility with little of the headaches.
- What taxes will apply? Oh boy, what a minefield this one is!
- Depending on usage there may be a Federal transportation Excise Tax (FET). Of course, the IRS and the FAA don’t necessarily agree on what constitutes “commercial usage” so you may be in for some differing interpretations.
- State sales and use tax comes into play. Most states impose a sales tax on the purchase and delivery of an aircraft within their state, and nearly all have a similar tax on the use of the aircraft within their state. A couple of years ago, a client insisted that he did not owe the State of New Jersey any use tax even though he clearly purchased, took delivery, and housed the plane in the State! Luckily for us, he is no longer a client…..
- There are rules on imputed income for the personal use of a business aircraft so, if a plane is held mainly for business usage, be prepared for a tax bite when the usage is actually personal.
- There are rules concerning depreciation and allowable losses and material participation, basically determining what is deductible and when. Not particularly clear. What is clear is the need to determine up front why and how you own and operate the aircraft in order to determine the tax impact. Comprehensive assessment up front coupled with detailed records on the back end is critical to optimizing the tax bite.
So, if you end up deciding that it is indeed worth the hassle and you go for the gold (Donald Trump’s private 757 has gold plated seat recline buttons, safety belt hardware, power outlet covers, faucet handles and sink basins, for crying out loud!) please invite me over for a little spin. Somewhere in the Caribbean is really nice this time of year!