Page 14 - January 23

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Similarly, an aircraft holding company filing as an S corporation (Form 1120-S) or a Partnership (Form 1065) reporting a significant tax loss will also generate unnecessary interest from the IRS.
Even though it is a rare occurrence, we strongly recommend that our clients keep extremely detailed records to support the business use of their aircraft. Personal use of a business aircraft should also be handled based on the nature of the personal use. If you are audited, the key to success is your ability to establish that the aircraft is ordinary and necessary to support your business activities, and be able to support this claim with contemporaneous documentation, which includes detailed flight log records. Emails and calendar entries to collaborate that a business meeting took place will be very effective.
Managing state sales tax audit risk
Unlike IRS income tax audits, state sales and use tax audits occur on a regular basis. In some states, it is a certainty that an aircraft owner will receive a sales/use tax inquiry from the State Department of Revenue after the purchase of an aircraft. Therefore, if you are claiming a sales tax exemption on the purchase of an aircraft, you should be prepared to present documentation and flight logs to support the exemption claimed.
With the advancement of flight tracking websites, and the common requirement of state aircraft registration, it is highly unlikely that you can avoid scrutiny of your aircraft from state taxing authorities by utilizing a Delaware or Montana LLC. I refer to this state tax avoidance strategy as playing a game of “hide and seek.” If caught, you will owe tax on the purchase plus penalty and interest.
State sales and use tax planning varies greatly from state to state. Some of the more common exemptions that may be available are:
= Interstate commerce exemption
= Occasional or private party purchase exemption = Rental and leasing exemption
= Commercial charter use exemption
Due to the mobile nature of aircraft, it is important to determine if your aircraft may be subject to the jurisdiction of multiple states, such as the state of a second home or office locations. KA
Daniel Cheung is a principal of Aviation Tax Consultants, LLC (www. aviationtaxconsultants.com), which is celebrating its 20th anniversary in 2023. ATC’s consulting services include the elimination or reduction of sales and use tax, maximizing income tax savings, controlling the cost of personal use of the aircraft, complying with passive activity loss and related party leasing rules and Federal Aviation Regulations. Cooperation with client’s current tax and legal advisors is welcome and encouraged.
12 • KING AIR MAGAZINE
JANUARY 2023