Aircraft Ownership: Your Private Jet, Taxes, The FAA and Liability of Private Jet Charter

On more than one occasion, Nel Stubbs has unfurled this clear encapsulation of how the FAA, IRS and liability rear their familiar, but let’s face it problematic faces.

Not meaning to be negative here, but lawyers and accountants can complicate the dynamic, when all you needed was …. “It is like a game of whack a mole.” This article is about the interplay of persistent gophers that mimic the FAA, IRS and liability.

“Buy the plane right… but for @$%&#’s sake…structure the ownership right.” — Humbled Jet Owner #47

To be clear, despite the hordes of lawyers that surround aircraft and jet owners, the simple fact is that few really grasp how the cogs in all the wheels work when the great gears of aircraft ownership start clunking away. There’s money in those clunks, … and there’s even income, depreciation, and then, well… there’s also a good portion of mine fields.

When dealing with private and corporate aviation, related management and acquisition projects, there is typically consistent theme when the person writing the check thinks to themselves, “How am I going to set this up?”

For those of you are that aren’t familiar with the concept, you know it anyway: When you are able to scare one gopher {or pesky problem} into one hole, another rears its head out somewhere else. Put another way, beware any advisor that tells you that you can have your cake and eat it too.

Gopher #1 – The FAA, and Accoutrements

The FAA, on paper, cares about safety. The gist of what will drive their framework will be operational limitations based on the type of operation you have. And to be simplistic about it, they carve the universe of business aviation into two groups: For hire (Part 135 of the Federal Aviation Regulations “FARs”), and not for hire (Part 91 of the FARs.)

The good news is that if your aircraft is available for hire, when you aren’t using it, is that (mostly) great things happen. You get to put the liability on the shoulders of the manager (“operational control”), you get the income from their marketing, flying and in some cases you dodge a bevy of sales, use and related taxes. By way of example, in the great State of Maine, you are deemed an “interstate common carrier” no different than the tractor trailers humming up and down I-95, so yes, you get great tax treatment. No sales or use tax for you, since you are crossing state lines for hire.

So when you think of this gopher hole initially, it is rather innocuous and it remains so because many people who become jet owners after lots of due diligence and a careful aircraft acquisition process find themselves in bed with an aircraft manager. This aircraft manager is usually fairly good at doing the basics of keeping costs down and getting income back to the owner. So life is good, and you can even depreciate the aircraft on your taxes, so long as you smell the correct smell to the IRS, which brings us to the 2nd gopher.

Gopher #2 – The IRS and its Thick Book of Rules

The IRS looks primarily at two dynamics – is this a luxury toy thing that needs more taxation, or is it a vehicle that has some commercial purpose? The promised land for the newly minted aircraft and jet owner is depreciation and here is where our first gopher interplay leaps up:

If the aircraft is operated 100% 135 then the depreciation becomes passive. Your accountant will tell you whether this is a good or bad thing depending on other types of assets you may own and how that income flows to you.

However, if the aircraft is operated primarily Part 91 then it is a different story as the owner is now materially participating in the operation of the aircraft. But here’s the rub, if you “materially participated in the operation of your aircraft” then yep, you have operational control in the eyes of the FAA when you use your aircraft under Part 91. And from a risk and liability perspective, you now have the risk and it isn’t the FAA you’ll need to worry about – it is everyone else armed with their lawyers and inspectors.

You’ll want to have a solid understanding of your insurance policy and take a look in the mirror to see what steps you’ve taken to mitigate risk for those flights that are conducted under Part 91.

But let’s focus on the good news and how to get more of it: If you don’t have other forms of passive income (and things that depreciate from that income) then operate primarily under Part 91 and bingo you get the magical depreciation schedule you were dreaming about when the aircraft sales guy started chirping away about the merits of a new airplane.

This is a very big challenge for the fractional, block charter and other 3rd party sales people since when an owner looks deeper into what they are actually getting. If you fly 10, 25 or 50 hours, sure… commitment is a hard thing. But when you fall deeply in love with the candy that is so hard to give up (your own plane, there, ready to go) your hours tend to climb beyond 100 per year, especially if you are using it both personally and for work.

So our big dividend and W2 people have hope for depreciation, but as is the nature of the game, a gopher shall rear its head as your tax return smile broadens.

Gopher #3 – Depreciation vs. Operational Control

Our third gopher, liability, presents an interesting, but manageable problem:

  • You’ve decided that your going to operate primarily under Part 91 since your tax advisor, confirms this is the way to go.
  • Your manager is an adept Part 135 / 91 management firm and can operate under 91, yet deliver “better than 135” type risk mitigation.

… but,

  • But your legal advisor reminds you that you need to carefully insure for this type of operation, since there is now a transfer of liability to you for the operation of the aircraft.

The price of admission to the great depreciation club isn’t always discussed as it should be: Having operational control isn’t the end of the world, so long as you act like any responsible Part 91 flight department would: You audit, you oversee and you make sure that you are in a violation and risk free environment – a nice place for anyone, under any circumstances, anyway, right?

Operational control is inherited when you have materially participated in the operation of the aircraft. So when it comes to “operational control” you simply “have it.” As far as the FAA is concerned you made the decision to initiate flights – even though you are in back and most likely not flying the airplane.

So when you operate privately, or for your own business use exclusively, the owner (who typically knows little about the risks of operations and flying) maintains the operational control. In other words, the owner is liable for the operation of the aircraft.

So if you operate under Part 91, the good news gopher is you get the depreciation, the bad news gopher is that you have liability to manage, though it is stuff you’d kind of want to know a lot about in any type of flying you engage in.

Rectification Scheme: If you elect going this route, the smartest back stop is to manage the risk and do this by understanding it. First up is the thing that matters to you most: “We will not hurt this airplane, the people in it, or outside of it.” If you aircraft management culture is one that truly internalizes this, you can build a scenario where you are as statistically safe as the airline cousins are, who, for practical purposes, just don’t have accidents statistically anymore.

Our recommendation to any Part 91 flight department or private user, family office, trustee or similar flying arrangement is to subject the aircraft and crew to the highest standard possible of audit, transparency, best practices on continuous improvement process so that the liability is eliminated to the extent possible. Once you create the culture, your defense is that the only way things ever go wrong is when they are, what the insurance community would term, “acts of God.” Also, carry enough insurance and really wrap your arms around that insurance policy to understand that FAR violations and good operating practices are the key to sound sleep.

The Hybrid Hope

Ultimately most aircraft managers have Part 135 (revenue / for hire / operational control) capability and when they are properly briefed, managed and integrated into the family office, lawyer, risk manager or advisors they can set up your aircraft for being flown under Part 91 or 135 depending on your needs. Better yet, despite the lax safety requirements of Part 91, you can operate the safety standard to the highest level, while you also have the paperwork done properly for the IRS. When doing hybrid operations it is key to have tax, legal and operational advisors squarely on the same page.

Private and business aviation is a boon to those who value their time, efficiency and safety, but lining up the elements before you pull the trigger on aircraft acquisition or management is key for harmonious operations and sane gopher management.