--- url: 'https://www.fmjlaw.com/the-pre-flight-checklist/' title: The Pre-Flight Checklist author: name: Adam url: 'https://www.fmjlaw.com/author/adam-brownfmjlaw-com/' date: '2024-04-02T16:27:22+00:00' modified: '2025-04-16T18:48:53+00:00' type: post summary: Guidance for Non-Aviation Professionals Whose Clients Own (or Want to Own) Aircraft. categories: - Article - Thought Leadership tags: - aircraft - airplane - Aviation - estate - planning image: 'https://www.fmjlaw.com/wp-content/uploads/2024/04/Small-Plane-Featured-1.png' published: true --- # The Pre-Flight Checklist ## Guidance for Non-Aviation Professionals Whose Clients Own (or Want to Own) Aircraft Your business clients (and ours) are sophisticated, innovative, smart people.  They have figured out how to build an organization, market a new product or service, or do something else extraordinary to make money.  And sometimes they want to indulge in a dream they have had for years and purchase an aircraft for their business, their family, and/or themselves.  Being smart, sophisticated people, they also sometimes think that this should be something easy to do and that they can figure it out.  Makes perfect sense, right? For better or worse, though, aircraft ownership is complicated.  Few assets are as heavily regulated as aircraft, especially when you have creative, multi-faceted ideas about how to use them. If you are trying to own an aircraft for your business but have mixed personal and business usage, for instance, or if you share usage of your aircraft with friends and want to share expenses, you will quickly run into many potential pitfalls and liabilities.  Aircraft owners need to consider state and federal tax issues, safety regulations and usage restrictions from the Federal Aviation Administration (FAA), and potential insurance and liability issues, among many other concerns. If your clients are buying their first aircraft (or their first aircraft in a while), it is always good to plan ahead and to think through these complications before any transaction. ### What are the Top Five Things My Business Client Needs to Know About Aircraft Ownership in 2024? At FMJ, we regularly speak with clients about aircraft ownership, and we help them work from the initial dream stage all the way through ownership. Here are some of the most common questions and concerns about aircraft ownership in 2024: #### 1. Is Bonus Depreciation Available if I Buy an Aircraft this Year? One of the draws that helped make aircraft ownership very attractive for business owners in recent years was the possibility to write off the entire purchase price of an aircraft against revenue in the first year of ownership. Under the 2017 Tax Cuts and Jobs Act, it was theoretically possible to take 100% bonus depreciation in the first year of ownership of a used or new aircraft.  In 2024, the ability to take depreciation has been “sunsetted” such that it is only possible to write off 60% of that aircraft price.  There have been efforts in Congress this year to attempt to revive 100% bonus depreciation, but that has also now received pushback from election-year politics. It is possible that we might see 100% bonus depreciation again before the end of the year, but it is by no means certain. Whatever the bonus rate will be in 2024, your client should be aware that the ability to take bonus depreciation is truly theoretical and is subject to satisfying specific requirements.  Theory does not necessarily translate into reality for everyone for several reasons:  - Bonus depreciation only applies when you can show qualified business use of the aircraft. The general requirement is that more than 50% of the use of the aircraft must be for business.  While that qualified business use can be measured in different ways, it is necessary to measure it – and document it – in case it is challenged.  Mixed business and personal use can significantly complicate the ability to sustain the deductions. - Leasing can also significantly complicate the calculations of qualified business use.  If you are sharing the aircraft with a co-owner, it is frequently necessary to own the aircraft in a leasing company that can limit your depreciation deductions.  Leasing is considered a *per se* passive activity, which can trigger passive loss limitations, in addition to complicating the requirements for reaching 50% qualified business use. - Also, under the 2017 Tax Cut and Jobs Act, Congress disallowed deductions for business and personal entertainment, flights, and commuting (among other things), which can dilute bonus depreciation. If your client is planning to purchase an aircraft to obtain an aircraft-sized deduction on their taxes for 2024, you and your client should carefully consider whether the purchase actually qualifies. Even if it does potentially qualify, you should also collectively consider whether your client *should* take such depreciation under the circumstances. #### 2. Should I be Concerned that the IRS is Stepping up Their Audits of Aircraft Owners? Could My Bonus Depreciation be Challenged? The IRS has indicated that it will be increasing audits of aircraft owners and analyzing business versus personal use of aircraft. So, whether your client is buying their first aircraft in 2024 or has taken bonus depreciation for another aircraft since the 2017 Tax Act, you should definitely pay attention here.  And you should potentially be concerned.  According to the IRS, “The audits will be focused on aircraft usage by large corporations, large partnerships and high-income taxpayers and whether for tax purposes the use of jets is being properly allocated between business and personal reasons.”  In large part, this was entirely predictable.  When FMJ sits down with a potential aircraft buyer, two of the most common questions are: - Do I qualify for bonus depreciation this year? - And if I do qualify, is it a good idea for me to take the bonus depreciation? There are multiple considerations here that we try to walk through with our clients.  What is your likely mix of business and personal usage for the aircraft?  How are you going to document your usage so that (among other reasons) you can cleanly demonstrate that your aircraft is predominantly used for business?  Even if you might qualify for accelerated depreciation, should you consider taking depreciation on a slower basis, typically on a five-year MACRS basis or a six-year Alternative Depreciation Schedule?  You might be confident in your business use, but is the amount of your potential deduction (imagine a $10 million aircraft) so outsized as to your business’s revenue that you are making yourself an audit target and creating an argument that the use of your aircraft does not qualify as an ordinary and necessary business expense? In light of the IRS’s stated intent to increase aircraft-related audits, every aircraft owner should be prepared to defend their tax positions related to the factors above.  One of the best things you can do to advise a recent buyer is to take a look back at how they have handled the depreciation to date and all the factors you depend upon to justify that result.  Decide if there are strategies, such as supplementing existing recordkeeping, that could be addressed to bolster their position.  For clients that are newly buying an aircraft, consider these factors upfront (including the fact that they may well be an audit target in the near future) and plan accordingly. #### 3. Do I Need to Worry About Liability for My Company if I am Operating an Aircraft? What About Liability for My Family? Can I Avoid Liability by Owning My Aircraft in an LLC? Clients are sometimes so excited about the prospect of their purchase that they forget an immutable truth: owning and operating an aircraft comes with risks.  Some people compare the risks to owning other recreational vehicles, but the fact is that boats and ATVs do not fall from 10,000 feet in the air.  Aircraft definitely come with their own challenges. One basic challenge is this: when a client’s company is operating an aircraft, whether it is one that it owns or one it leases, that company will be considered in “operational control” under FAA rules and thus fully responsible for the potential liabilities when things happen during the operation.  The same is true for the individual client, whether that client operates the aircraft with a hired crew or a personal pilot’s license. Can you eliminate those risks?  In reality, the answer is no.  There is a great deal of misinformation about liability management in the aviation world that suggests otherwise, but it is just plain wrong.  Simply owning an aircraft in a limited liability company *might* limit your liability as an owner of the aircraft, for instance, but it certainly does not insulate you from risk as an operator.  In fact, under FAA regulations, it is illegal to operate an aircraft from a special purpose company whose only substantive business is to operate aircraft unless that company has a charter certificate issued by the FAA and Department of Transportation (DOT).  This structure is frequently known as the “flight company trap,” and many unsuspecting aircraft owners and advisors fall into it.  Failure to comply with the rules can result in fines, loss of pilots’ licenses, and potentially loss of insurance coverage.  If you own your aircraft in a special purpose company, it is important to treat that company as a leasing company instead, thereby leasing the aircraft to the companies or individuals who are actually going to operate it. So how do the operators manage the risk?  They should probably approach it the same way that aviation insurers approach the situation.  What are the risks you are incurring when you operate the aircraft?  If you are carrying high wealth individuals (including the owner/operator) or company executives, you should probably be sure to carry more liability insurance than you might otherwise.  You obviously cannot limit potential liability arising from accidents involving buildings or individuals on the ground, but it is worth assessing your overall risks and increasing your coverage as available.  One rule of thumb we have used is that you should have a minimum of $3 million to $6 million in coverage for every seat in the aircraft, whether occupied or not.  For more expensive, higher-powered jets, there are other measures that might apply. Ultimately, carrying enough insurance is your best hedge against potential liability, and we always recommend buying as much aviation liability coverage as you can realistically afford. #### 4. The Aviation Insurance Market in 2024 is Tight, and I Can’t Get the Limits I Want. Are There Other Strategies for Limiting Liability? One frequent complaint that we hear from new aircraft buyers who are pilots is that it is not possible to buy liability coverage in excess of $1 million to $2 million per occurrence. This amount could potentially increase in subsequent years, after the owner/pilot gets enough hours of experience, but even then, it might be limited to $5 million per occurrence. In many cases, those insurance amounts must cover both the defense costs in resulting lawsuits and any settlements with injured parties. Such cases are almost always under-insured.  There may also be certain aircraft types (ones with a single engine, for instance) that may be harder to insure, and there are some non-US jurisdictions where optimum limits are just not available for commercially reasonable prices.  There are risk mitigation strategies available that are worth considering.  For instance, among others: - Aircraft operators who run businesses should consider hiring professional pilots to fly for them on company/business flights, especially when people other than the aircraft owner are on board. Typically, insurers will provide more coverage for these professional pilots. - When an aircraft can be operated with one pilot, should it be operated with two pilots instead?  Insurance companies frequently want that to be so and will provide better limits or pricing accordingly. - When circumstances allow, consider liability waivers for guests on the plane.  Waivers can be awkward with company employees (who would be covered by worker’s compensation in any case) and possible business prospects, but they could work well for personal guests.  You can also agree to limit liability and recourse among co-owners and co-lessees. The enforceability of liability waivers varies from state to state, and it may not be possible to insulate yourself in some circumstances. That said, it is worth considering and evaluating the possibility. - When it comes to transporting executives, it may also be useful to have a written company manual that focuses on risk management. For instance, perhaps no more than one or two C-Suite executives should fly together on the same flight. Ultimately, it is important to think about these issues with your insurance broker or lawyer before you buy your aircraft, if possible.  Different clients will make different choices when confronted with these realities, and in extreme cases, some clients may opt not to buy an aircraft because of the potential liability.  But it is best to know this before you make your purchase.  #### 5. Will Sales Tax Always Apply to My Purchase? Are There Strategies for Reducing the Taxes Due at Closing? After Closing? One thing that people sometimes do not realize is that aircraft are considered personal property under state laws. This typically includes analysis under state sales and use tax statutes, and they can be (and frequently are) taxed the same as the toaster or a hammer, depending on the state. Also, just to complicate things, aircraft are mobile assets that have a tendency to move around. The question that potential aircraft buyers need to ask themselves as a result is this: *where* might my aircraft purchase be taxed?   In general, it is important to consider taxes in three places: (1) where the aircraft is physically sitting at the time of closing; (2) where the aircraft will be based after closing; and (3) where the aircraft may frequently visit in any given year after closing.  Any of these jurisdictions might try to tax your aircraft purchase after closing. Most buyers, sellers, and brokers know to check on whether the closing is taking place in a tax-friendly jurisdiction and to obtain appropriate exemption certificates when necessary. If work is being done on the aircraft in a jurisdiction without a good sales tax exemption, the parties will typically move the aircraft to another state.  Most sellers will also try to allocate the potential tax and fee liability to their buyers because they know that the post-closing behavior of the buyers may also affect the taxation.  If a buyer bases its aircraft in Minnesota, Minnesota will eventually discover that the aircraft is sitting within its borders and will try to have you pay use tax on the aircraft along with a registration fee.  Some states will also try to tax and/or register your aircraft if you land within the state more frequently than 60 or 90 days a year.  Other taxes or fees might also apply.  For instance, if your aircraft is sitting in Texas on January 1st of any year, you may also have to pay personal property taxes on the aircraft. Your risks are not limited to jurisdictions within the United States.  You may have as much or more risk if you close on your aircraft transaction in a foreign jurisdiction.  Closing in any EU country, for instance, can subject you to significant value added taxes (VAT), as can flying into EU countries after the fact if you do not deal with appropriate customs imports in the territory. Is it possible to limit the tax liabilities after closing?  Very possibly, if you plan ahead.  In many states, for example, there is a purchase for lease exemption that will allow aircraft owners to defer taxes on the sale, so long as you collect taxes on the leasing of the aircraft to its operators.  For those that are not leasing, some states do allow trade-in exemptions if you sell an aircraft at the same time you buy a new one.  While the 2017 Tax Act did away with like-kind exchanges of aircraft for income tax purposes, the corresponding trade-in exemptions may still exist at the state level.  It can be worth exploring. --- For better or for worse, aircraft use and ownership is often more complicated than clients imagine, but there are usually ways to work through or around the complications.  A little advanced planning can go a long way toward making aircraft ownership and use much smoother in all respects. If you need further information on these or any other aviation-related matters, contact Kevin Johnson at 952-995-9576 / [kevin.johnson@fmjlaw.com](mailto:kevin.johnson@fmjlaw.com).  [Please click here](https://www.fmjlaw.com/practice-area/transportation-logistics/) to learn more about our Aviation & Transportation Practice Group. [](https://www.addtoany.com/add_to/facebook?linkurl=https%3A%2F%2Fwww.fmjlaw.com%2Fthe-pre-flight-checklist%2F&linkname=The%20Pre-Flight%20Checklist)[](https://www.addtoany.com/add_to/twitter?linkurl=https%3A%2F%2Fwww.fmjlaw.com%2Fthe-pre-flight-checklist%2F&linkname=The%20Pre-Flight%20Checklist)[](https://www.addtoany.com/add_to/email?linkurl=https%3A%2F%2Fwww.fmjlaw.com%2Fthe-pre-flight-checklist%2F&linkname=The%20Pre-Flight%20Checklist)[](https://www.addtoany.com/add_to/linkedin?linkurl=https%3A%2F%2Fwww.fmjlaw.com%2Fthe-pre-flight-checklist%2F&linkname=The%20Pre-Flight%20Checklist)