Purchasing a King Air can be an exciting step for a business owner. Flying an airplane for business purposes can save time and improve access to customers and projects while creating significant tax planning opportunities. However, the tax benefits of aircraft ownership are not automatic.
Many King Air buyers have their eyes set on bonus depreciation but overlook the details that determine if they qualify. Before closing on the aircraft, buyers should understand the most common tax mistakes that can create issues later.
1. Buying the aircraft in the wrong entity
One of the first decisions in an aircraft acquisition is determining who or what entity should own the aircraft. Many buyers assume that forming a new LLC to own the aircraft is the right answer. While this is usually true, the member of that LLC is often overlooked.
The structure should consider who will use the aircraft and how the tax deductions will flow through to the taxpayer.
Buying in the wrong entity can create problems with increased IRS audit risk, passive activity rules, related-party leasing or the ability to use the depreciation deduction.
2. Assuming the aircraft is fully deductible because it is used for business
A King Air may be used frequently for business, but that does not mean every dollar of aircraft expense is automatically deductible. The aircraft’s use must be analyzed based on every flight and every passenger.
Business flights may include travel to customer meetings, project sites, conferences, board meetings, facility visits or other ordinary and necessary business activities. However, personal travel, entertainment-related flights, commuting, spouse or family travel and mixed-purpose trips may need to be treated differently.
For bonus depreciation purposes, buyers generally need to pay close attention to whether the aircraft is used more than 50% for qualified business use. Falling below that threshold can significantly change the depreciation result.
3. Waiting until after closing to discuss state tax
State sales and use tax planning should happen before closing, not after the aircraft has been delivered.
A King Air purchase can easily create a six-figure state tax issue. Closing in a fly-away state is helpful, but it does not eliminate tax exposure in the state where the aircraft will be based. Each state has its own rules, exemptions, forms, deadlines and documentation requirements. Some states provide exemptions for leasing, interstate commerce, common carrier operations or nonresidents. Some states also impose aircraft registration fees or property taxes.
The buyer should understand the sales and use tax plan before closing, including where the aircraft will close, where it will be based and how it will be used during the first several months after purchase.
4. Failing to track passengers and business purpose
The flight log is the most important tax record for an aircraft owner. A closing statement shows that an aircraft was acquired. The flight log helps support how the aircraft was used.
Aircraft buyers sometimes keep incomplete records, especially in the first few months after closing. That can create problems later when the CPA is preparing the tax return or when the taxpayer needs to support the deduction in an audit.
5. Ignoring personal use and SIFL reporting
Many business aircraft also see some level of personal use. Personal use does not necessarily ruin the tax plan, but it needs to be identified and handled correctly.
If the aircraft is owned by a business, personal flights will create taxable fringe benefits. The Standard Industry Fare Level, commonly referred to as SIFL, is a method used to value non-business flights on employer-provided aircraft. Ignoring personal use is one of the easiest ways to create a tax reporting issue.
6. Missing placed-in-service timing
Year-end aircraft acquisitions are common, especially when buyers are trying to secure depreciation benefits for the current tax year. However, signing a purchase agreement or funding escrow does not mean the aircraft has been placed in service.
Generally, the aircraft needs to be ready and available for its intended business use. Delays involving inspections, maintenance, delivery, registration or pilot training can affect the placed-in-service analysis.
This issue is especially important for buyers closing late in the year. If the aircraft is not actually ready and available for business use before year-end, the depreciation deduction may not be available until the following tax year.
Final thoughts
King Airs can provide meaningful business and tax benefits, but the planning should begin before closing. Buyers should not wait until the tax return is prepared to determine whether the aircraft was purchased in the right entity, properly placed in service, used enough for business and adequately documented.
Before acquiring a King Air, business owners should coordinate the ownership structure, state tax plan, flight log process and personal-use reporting with their aviation tax advisor and regular CPA.
The aircraft may be a powerful business tool, but the tax benefits depend on proper planning and documentation from day one.