Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Aircraft Depreciation to Cut Taxes
Transcript
- Lucas: So a few weeks ago I was talking with a family office in Palm Beach — managing about $2 billion — and the principal mentioned they were buying a Gulfstream G650. Not because they needed to fly more. Because the tax depreciation was too good to pass up. Luna: Wait — the tax deduction is so generous that it actually drives the purchase decision? That sounds like the tail wagging the dog. Lucas: In this case, yes. And it's surprisingly common among ultra-wealthy families. Under current law — and this is 2026, so bonus depreciation is phasing down but still at 60 percent — you can take a brand new $40 million jet and immediately deduct more than half of it in year one. Luna: So we're talking about a $24 million deduction on a $40 million plane in the first year, assuming 100 percent business use? Lucas: Exactly. And the 60 percent bonus applies to the entire cost, not just the incremental amount. Plus you layer on regular MACRS depreciation on the remaining basis. The total first-year deduction can hit roughly $28 million, depending on the convention and the month you place it in service. Luna: That is an enormous tax shield. But the IRS isn't just handing out $28 million deductions. There's a catch, right? Lucas: The catch is the business-use test. To claim bonus depreciation on an aircraft, at least 50 percent of the total flight hours must be for business purposes. And the IRS has gotten very aggressive about auditing that. They're looking at logs, crew schedules, even the timing of flights relative to board meetings. Luna: What about personal trips? The family still wants to fly to Aspen for ski week. Lucas: Personal flights are allowed, but they can't exceed 50 percent of total hours. And here's where it gets tricky: entertainment flights — like flying clients to a basketball game — those count as business use. But flying your kids to summer camp? That's personal. The family office I mentioned ended up structuring the aircraft's usage schedule so that every third flight was a client or investment meeting just to stay above the threshold. Luna: Does the IRS have a specific rule about fractional ownership shares? Because I know NetJets has a huge program where you buy a quarter or an eighth of a plane. Lucas: Great question. Fractional ownership programs like NetJets or Flexjet get treated differently. The IRS has issued guidance — Revenue Procedure 2012-29 — that provides a safe harbor for fractions. If you own at least a one-sixteenth share, you can use the same depreciation rules as a whole aircraft, but the business-use test applies to each owner separately. So if you use your share for 70 percent personal trips, you can't deduct bonus depreciation on it. Luna: So the real play is to buy the whole plane and then lease hours back to a management company to pad the business-use percentage? Lucas: Yes, that's a common structure. The family sets up a wholly owned entity to own the aircraft. That entity then enters into a dry lease or a management agreement with a charter operator. The charter hours count as business use for the owner. But there's an important nuance: the owner can't use the plane during those charter hours — they have to pay fair market value for their personal usage. Luna: And if they pay fair market value, that's a taxable event, isn't it? The owner is essentially renting the plane from their own entity. Lucas: Right. And the entity that owns the plane recognizes rental income. But that income is offset by the huge depreciation deductions. The net effect is often a tax loss in the early years. And that loss can shelter other income from the family's operating businesses or investments. Luna: This all sounds like something that would attract IRS scrutiny. Are there any recent enforcement actions or letters going out? Lucas: Yes. In fact, the IRS launched a letter campaign in late 2025 targeting aircraft owners who claimed bonus depreciation but might not have met the business-use test. They sent out compliance letters requesting flight logs, crew records, and tax return schedules. Some families we work with are now undergoing audits specifically on their aircraft deductions. Luna: So the window for aggressive aircraft depreciation might be closing? Lucas: The deduction itself is phasing down. Bonus depreciation drops to 40 percent in 2027, then 20 percent in 2028, and goes to zero in 2029 unless Congress extends it. So families who want to take advantage are buying now. But the real risk is audit exposure. If you push the business-use percentage to 80 or 90 percent and the IRS recharacterizes some flights as personal, you could lose the bonus depreciation entirely. Luna: Let's talk about a concrete number. Say a family buys a $30 million Bombardier Global 7500. What's the tax savings in year one assuming they hit the 50 percent business-use threshold? Lucas: At 60 percent bonus depreciation, that's $18 million immediately. Then you have regular MACRS on the remaining $12 million. MACRS for aircraft is 7-year property under the 200 percent declining balance method. In year one, that's another roughly $1.7 million. Total first-year deduction: about $19.7 million. At a combined federal and state rate of, say, 40 percent, that's $7.9 million in tax savings. Luna: That's real money. But the family still has to pay for the plane — $30 million. So they're spending $30 million to save $7.9 million in taxes. That's not a winning trade unless they needed the plane anyway. Lucas: Exactly. That's the crucial point. The depreciation is a tax deferral, not a free lunch. The plane is still an expense. And when they eventually sell the aircraft, there's depreciation recapture — the gain is taxed as ordinary income up to the amount of depreciation taken. So you're really just deferring tax, not eliminating it. Luna: Although they could 1031 exchange into another aircraft and defer again, right? Lucas: Yes, like-kind exchanges under Section 1031 apply to aircraft as long as they're held for business use. So families can roll the gain into a newer plane and keep deferring indefinitely. It's a strategy that works well for families that plan to own aircraft continuously. The tax code essentially subsidizes the private aviation industry for the ultra-wealthy. Luna: It's fascinating — and a bit controversial. The government is essentially encouraging rich people to fly private by offering massive tax breaks. Lucas: It is controversial. But the policy rationale is that business aviation supports jobs and economic activity. The IRS allows these deductions to incentivize business travel. The problem is that the line between business and personal is hard to draw. Luna: And the families who do this tend to have sophisticated tax advisors. A DIY approach would be disastrous. Lucas: Absolutely. The flight logs need to be meticulous. Every trip should have a business purpose documented — meeting notes, event agendas, client names. If you're flying to your vacation home in Telluride and you happen to have a one-hour board call while you're there, the IRS will likely question whether that's truly business use. Luna: I've heard that some families use a 'time split' method — they track total flight hours and allocate a percentage based on passenger manifests. Is that acceptable? Lucas: The IRS prefers an actual-miles method: you measure business miles vs. total miles. But some taxpayers use a time-in-service approach. Both can work if consistently applied. The key is contemporaneous records. You can't reconstruct logs a year later during an audit. Luna: What about the alternative minimum tax? Bonus depreciation is a preference item for AMT, right? Lucas: For individual taxpayers, yes — bonus depreciation can trigger AMT. But for C corporations, the AMT was repealed in the Tax Cuts and Jobs Act. Most ultra-wealthy families own aircraft through pass-through entities — LLCs or S corporations — so AMT can bite them. However, the deduction is so large that even with AMT, there's often a net benefit. Luna: So the ideal structure is a C corporation owned by the family office? Or is there a better vehicle? Lucas: Many families use a single-member LLC taxed as a disregarded entity. That gives them flexibility to claim the deduction on their personal return. But if AMT is a concern, some convert to a C corporation — though then you lose the ability to offset other passive income with the losses. It's a classic trade-off. Luna: I want to come back to something you mentioned earlier — the IRS letter campaign. What exactly are they asking for? Lucas: The letters — officially CP-2000 notices — request detailed flight logs, crew expense records, and a completed Form 4562 for depreciation. They're particularly focused on taxpayers who claimed bonus depreciation on aircraft but whose total business use seems low relative to the hours flown. The IRS is using data from the FAA's registration database and flight tracking services to cross-check. Luna: So they're using ads b data? That's the public flight tracking system. Lucas: Exactly. The IRS can see where your plane took off and landed. If the pattern shows regular trips to vacation destinations without corresponding business activity, that's a red flag. One advisor I know had a client whose plane went to Nantucket every July 4th weekend. The IRS flagged it immediately. Luna: That sounds like a tough audit to defend. Unless you're holding board meetings on the beach. Lucas: Right. And the burden of proof is on the taxpayer. So the documentation needs to be airtight. For our listeners who are advisors to ultra-wealthy families, this is a critical area to review before filing. Luna: It's also worth noting that the bonus depreciation phaseout is already locked in. So 2026 is a big year for aircraft purchases. Lucas: That's exactly right. We're seeing a rush of orders right now. Gulfstream and Bombardier are both reporting multi-year backlogs. The manufacturers are benefiting directly from the tax code. Luna: If our money conversations have helped you think about your own tax strategy differently, or even just given you a better understanding of how the wealthy optimize their finances, you can support the show by buying us a coffee. It's buy me a coffee dot com slash fexingo — all one word, lowercase. That kind of support is what keeps this podcast independent and ad-free. Lucas: Yeah, it really does help us keep doing deep dives like this one. No sponsors, no pressure — just listeners who find value in the content. So thank you to anyone who contributes. Luna: Now, back to aircraft depreciation. One more nuance — what about the 'luxury automobile' limitations? Do those apply to aircraft? Lucas: No, aircraft are explicitly exempt from the passenger automobile limits under Section 280F. So you don't have the annual dollar caps that apply to luxury cars. That's one reason planes are such a powerful deduction vehicle — the full cost is eligible. Luna: That's a huge advantage over, say, a $100,000 Mercedes — which is capped at around $18,000 in year one depreciation. Lucas: Exactly. So the tax code is structurally biased toward big-ticket assets. If you're going to spend big, the government gives you a bigger deduction. It's a feature, not a bug. Luna: So what's the one takeaway you want our listeners to remember from this episode? Lucas: That aircraft depreciation is one of the most potent tax strategies available to ultra-wealthy families, but it requires discipline. The business-use test is unforgiving. A family that buys a plane purely for tax savings, without a genuine need for business travel, is likely to get burned by the IRS. But if the plane serves a real business purpose, the tax benefits can be substantial. Luna: And with bonus depreciation phasing down, time is running out to lock in the 60 percent rate. Lucas: Right. For families considering a purchase, 2026 is the sweet spot. After this year, the deduction shrinks. So if you're advising a family with aviation needs, this is the moment to act. Luna: I know I'll never look at a Gulfstream on the tarmac the same way again. Lucas: Me neither. It's not just a plane — it's a tax shelter with wings.