The Time To Get A Company Plane

November 15, 2004
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GRAND RAPIDS — Dan Lynn says he spends several hours a day mining tax facts out of the Federal Register, IRS regs, tax court rulings and still-fresh federal tax statutes.

And some of those facts, he told the Business Journal last week, indicate that if a firm want a plane for business travel, the tax laws make this a good time — a very good time — to consider buying it.

Lynn, a CPA and a tax principal with the local office of the Rehmann Group, says the information stems from the Job Creation Act of 2004, and the federal tax acts of 2002 and 2003.

Combined, he said, the three make this year a good time to buy any fixed asset for one’s business — and that one such asset would be an aircraft used at least in part for the business.

The three measures work together, he said, to practically create the down payment for a fixed asset such as a new plane.

First, he said, the Job Creation Act extended the life of the $100,000 Section 179 deduction for two more years. The deduction’s six-figure level was to have expired this year, dropping back to its old point of $25,000.

The Section 179 deduction applies to any newly purchased asset, whether it’s used equipment or brand-new

Second, in the case of a newly produced asset, the tax acts of 2002 and 2003 provide for a 50 percent first-year depreciation deduction in addition to the first year allowance in the standard 5-year depreciation schedule.

“Now, let’s say for example that a corporation is buying a brand-new $400,000 airplane,” he said.

“When you buy it, first you get the $100,000 Section 179 deduction.

“Then you get the 50 percent depreciation bonus. That’s $200,000. And together with the Section 179 deduction, that’s three-fourths of the plane’s purchase price, right there.

“But then you also get to deduct the regular first-year $20,000 on the five-year depreciation schedule,” he added.

He said that then totals a first-year depreciation deduction of $320,000, leaving $80,000 to depreciate over the remaining four years.

What really counts, Lynn said, is the tax benefit resulting from an aggregate $320,000 deduction on the year of purchase.

“I think, looking at cases last year, that the cash flow from the tax benefit is just about 20 percent of the cost of the asset being purchased,” he said.

“So, really, when you go and you finance something, you’re typically going to want to have 20 percent down and you finance the other 80 percent. Well, the cash flow from the tax benefit is financing the asset — there’s your down payment.”

He said some of the same tax blessings inhere to fractional airplane purchases.

What brought the subject of airplanes up, he said, was learning that he had a client who bought an airplane for personal use and was doing a fair amount of business flying with it, but was taking no deductions for it.

“Well, there’ve been some favorable rulings in the past couple of years that are extremely favorable for planes or cars that are only used for part of the time for corporate purposes,” Lynn said.

He said that if a businessman has used his plane or car only part of the time this year for business, he’d strongly advise checking with a tax professional on the deductibility of those expenses.

“Even if it has a little bit of business use and the rest is for personal or hobby use, it might be worth looking into,” Lynn said.

Meanwhile, he added, if a businessman personally owns a plan or is considering buying a plane for business use, one ought to consider setting up an LLC to own the aircraft.

“One of the concerns in buying a plane is liability,” he said.

“So what I’d recommend to clients is that they set up an LLC wholly owned by the business and you either transfer ownership of the plane to the LLC — or you use the LLC to buy a plane.

“The LLC then isolates the other assets of the business from liability connected with the plane,” he said.

“The LLC is ignored for tax purposes,” he added, “but it’s respected for legal purposes so that you get the legal protection. It’s strictly legal protection and invisible for tax purposes.”

He stressed that the law governing personal use of such assets changed on Oct. 1, and that record-keeping is going to become more of an issue. But he said that anyone who used a personal plane earlier in the year for business purposes ought to check with a professional.

He said that mixed personal and business use of a plane is still possible.

“The only trouble is that there’s some ambiguity about how you deal with some expenses. There just are no IRS guidelines, so I’d recommend talking to a tax professional or your CPA about it.”

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