Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra Wealthy Families Use Aviation Management Companies for Tax Savings
Transcript
- Lucas: Alright Luna, let's talk about something I bet a lot of listeners have wondered about when they see billionaires stepping off a Gulfstream — how do these people actually own a private jet without it becoming a massive tax drag? Luna: I mean, you'd assume a plane is a giant hole for cash — fuel, crew, hangar, maintenance. How does it make financial sense? Lucas: That's exactly the question. And the answer is something called an aviation management company. It's a structure where instead of just owning the plane personally or inside a single-purpose LLC and paying all those costs yourself, you basically put the aircraft into a commercial charter operation that you also control. Luna: So you own the plane, but a company manages it and charters it out? Like a mini rental fleet for your own jet? Lucas: Exactly. The typical setup goes like this: you create a separate LLC to own the aircraft. Then you sign a management agreement with a qualified aviation management company — it could be an independent firm, or it could be your own family office's aviation subsidiary, as long as it meets FAA and IRS requirements. That management company handles the crew, scheduling, maintenance, and most importantly, it charters the plane out when you're not using it. Luna: And the tax magic happens because now the plane is used in a trade or business — the charter activity — so you can deduct operating expenses? Lucas: Right. Under Section 162 of the tax code, expenses ordinary and necessary to a trade or business are deductible. If the plane is purely personal, those deductions are gone. But if the management company is actively marketing the plane for charter, the aircraft is considered business property. That opens the door to deducting fuel, crew salaries, hangar fees, insurance, even depreciation. Luna: Depreciation is the big one, right? Planes are expensive and they depreciate quickly. Lucas: Huge. Under Section 168, business aircraft can be depreciated over five or seven years using accelerated methods. For a $40 million Gulfstream, that's several million dollars a year in non-cash deductions that offset charter income and even other business income, subject to certain limitations. And if the plane qualifies as 'listed property' used more than 50% for business, you can take bonus depreciation — currently 80% under the Tax Cuts and Jobs Act phase-down, but that's scheduled to drop to 60% next year. Luna: So the charter income covers some costs, the deductions offset taxes, and you still have a plane when you need it. What's the catch? Lucas: The IRS is very focused on personal use. You cannot treat the plane as a personal toy that you occasionally charter out. There's a strict set of rules around 'disqualified use' and 'qualified business use.' If your personal use exceeds 25% of total flight hours in a given year, the depreciation deductions get recaptured and you lose the accelerated method. You also have to track every single flight meticulously — who was on board, what business purpose, how many hours. Luna: I've heard that the IRS audits private aircraft aggressively. Is that true? Lucas: Absolutely. The IRS has a dedicated program targeting aircraft usage. They compare flight logs to tax returns. If your Schedule C shows a loss from the aircraft but your flight logs show trips to Aspen and the Bahamas, you're going to get a letter. I've seen cases where wealthy owners had to pay back taxes plus penalties because they couldn't document business purpose for enough flights. Luna: So you need a real charter business, not just a paper one. Lucas: Exactly. The management company has to actually market the aircraft to third parties at competitive rates. You can't just leave it parked and claim it's available for charter. If the plane flies less than a certain number of charter hours per year — industry guidance suggests at least 150 to 200 hours — the IRS may reclassify it as a hobby or personal asset. Luna: Let's talk numbers. What's a realistic scenario for a family with a $30 million jet? Lucas: Say you buy a pre-owned heavy jet for $25 million. Annual fixed costs — crew, hangar, insurance, management fee — might be $2 million. Variable costs per hour maybe $5,000. If you fly 400 hours personally and charter it out 200 hours at $10,000 per hour, gross charter revenue is $2 million. After variable costs, net charter income might be $1.8 million. But your depreciation on that $25 million plane using bonus depreciation could be $8 million in year one. That loss wipes out the charter income and then some, sheltering other income. Luna: But you can only use that loss against passive income or active business income depending on your material participation, right? Lucas: Great point. The passive activity loss rules apply. If you're not actively involved in the management company's operations — and most owners aren't — the losses are passive and can only offset passive income. But many wealthy families have other passive income from rental properties, partnerships, or royalties that those losses can offset. Alternatively, if the management company is structured as a wholly owned business where you materially participate, the losses could offset active income. Luna: I've also heard of families forming their own Part 135 charter certificate to self-manage. That seems like a way to keep more control. Lucas: It is, but it's incredibly complex. Getting an FAA Part 135 certificate requires a full operational specification, drug testing programs, a director of safety, annual FAA audits. Most families find it easier to contract with an existing management company. There are boutique firms that cater to single aircraft owners — they'll put your plane on their certificate and handle everything for a monthly fee plus a cut of charter revenue. Luna: So the tradeoff is between complexity and tax benefit. Let's talk about the alternative — fractional ownership. Lucas: Fractional ownership through companies like NetJets is simpler. You buy a share — say one-sixteenth of a jet — and get a guaranteed number of hours per year. You still get some tax benefits because the fractional company treats the aircraft as business property, but the deductions are proportional to your ownership share and business use. And you don't get the depreciation benefit yourself — the fractional company takes that. For someone who flies less than 200 hours a year, fractional often makes more economic sense. Luna: But for the ultra-wealthy who fly 500-plus hours, having your own plane through a management company can be a significant tax shelter? Lucas: That's the play. But it's not just tax. There's also an asset protection angle. By separating ownership in an LLC, you shield the aircraft from personal creditors and vice versa. And if the charter business is profitable, you could eventually sell the management company as a going concern. I've seen families exit after five years and recoup a good portion of their operating costs. Luna: Are there any pitfalls beyond IRS scrutiny? Lucas: Plenty. If you charter the plane too much, you might effectively convert it into a commercial operation, which could subject you to federal excise taxes on ticket sales. Also, state sales tax — some states exempt aircraft used in interstate commerce, but others don't. You need a good aviation tax attorney. And if you finance the plane, lenders often restrict chartering because it increases liability and wear. Luna: One more thing — does this strategy work for smaller jets? Like a Citation or a Phenom? Lucas: It can, but the economics are tighter. A $6 million light jet might only generate $400,000 in charter revenue, and fixed costs could eat that up. The depreciation benefit is also smaller. I'd generally say this structure makes sense if the aircraft is worth at least $10 million and you fly at least 300 hours a year. Luna: It's interesting how the tax code basically subsidizes business aviation for the wealthy. But I suppose that's true for a lot of business assets. Lucas: It's consistent with the principle that capital deployed in a trade or business should generate deductions. Whether that's fair or not is a policy question, but for families who are going to own a plane anyway, the management company structure is a rational way to reduce after-tax cost. Luna: Speaking of rational choices, you know, Lucas, this is exactly the kind of conversation I find valuable because it helps me think about tradeoffs. And I think our listeners appreciate that we can dive into these strategies without interrupting for ads. Lucas: Yeah, we keep the show ad-free intentionally. It lets us get into the weeds without rushing. If you find value in that, the best way to support the podcast is buy me a coffee dot com slash fexingo. It's a simple way to keep us going, and we put every bit of that into research and production. Luna: Agreed. And it really does make a difference. So back to aviation — what's one thing a listener should take away if they're considering this? Lucas: Don't do it for the tax benefits alone. The tax savings can be substantial, but only if you genuinely need the aircraft for business. If you're buying a jet primarily as a lifestyle asset, the management company structure adds complexity that may not pay off. Start with your actual flight needs, model the economics with a reputable advisor, and only then decide on the structure. And always, always keep meticulous records. Luna: Good advice. Thanks for the deep dive, Lucas. I'll never look at a tarmac the same way again. Lucas: Happy to demystify it. Until next time.