Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Family Offices Use Private Aircraft for Tax Efficiency
Transcript
- Lucas: So there's a question I get from a lot of advisors, and it's about the family that's finally at the point where they're considering a private aircraft. Not a fractional share through a service like NetJets, but actually owning the plane. And the conversation usually starts with the price tag, but it should start with something else: the entity structure. Luna: Right, because the way you hold the asset determines everything downstream, from deductions to liability. Lucas: Exactly. Take a family with, say, forty million in net worth. They're looking at a twelve million dollar jet, maybe a Gulfstream or a Bombardier. That's a significant allocation, and the first instinct is often to just buy it personally. But that's usually a mistake, especially if the business or the family office generates a lot of revenue. The better move is often to set up a separate LLC that owns the aircraft, and then the family office or the operating company leases the plane back from that LLC. Luna: So it's a lease structure, not a direct purchase. And that lease payment becomes the deductible expense. Lucas: Right. The LLC owns the jet, and the operating entity pays rent to use it. That rent is a legitimate business expense, as long as the use is genuinely business-related. And here's where the numbers get interesting. The IRS allows you to deduct the operating costs, the crew salaries, the hangar, the insurance, the maintenance—but only in proportion to the business use. If the plane flies four hundred hours a year and two-forty of those are for business, that's sixty percent, and you can deduct sixty percent of those costs. Luna: And what about the purchase price itself? There's depreciation, right? Lucas: That's the big one. Under current tax law, you can take bonus depreciation on a new or used aircraft, which means you can write off a huge chunk of the cost in the first year. But again, it's prorated. If the business use is sixty percent, you can deduct sixty percent of the twelve million, so seven point two million in the first year. That's a massive deduction against business income. Luna: But the IRS isn't stupid. They know a jet can be a toy. So what's the test for business use? Lucas: It has to be ordinary and necessary, and it has to be properly documented. The key is that you need to demonstrate that the primary purpose of the flight is business. So flying to a board meeting in another state, that's clearly business. Flying to your vacation home for the weekend, not so much. Luna: And that's where many families get into trouble—they don't keep good logs. Lucas: That's exactly the point. A few years ago, the IRS started scrutinizing aircraft deductions very closely. They want to see flight logs that show the date, the passengers, the purpose of the flight, and the business relationship of each passenger. If you can't produce that, the deduction can be disallowed, plus penalties and interest. And here's a nuance: the IRS also looks at entertainment use. If you fly clients to a golf outing, that's not fully deductible anymore. There are specific rules around 'entertainment' that changed a while back. Luna: So you're saying the documentation has to be airtight. Lucas: It has to be, yes. And this is where a good aviation tax specialist is worth their weight in gold. They'll set up the log system, they'll review the percentage annually, and they'll make sure the lease is structured at fair market value. If the rent is too low, the IRS can recharacterize it as a dividend or compensation. If it's too high, you're inflating deductions. So you need to be in the right range. Luna: And that's for a wholly owned aircraft. But what about fractional ownership? We've mentioned NetJets, but there are other programs. Lucas: Fractional is a different animal. With a fraction, you own a share of a plane, and the operating company manages everything. The tax benefits are more limited because you don't have the same direct control over the asset. You can still deduct the business-use portion of your management fees and your depreciation, but it's simpler and often less advantageous for a family that flies enough. For a family flying four hundred hours, whole ownership is usually more tax-efficient, but it's also more work. Luna: And there's the question of liability. If you own the plane, you're exposed to the risk. Lucas: That's another reason for the LLC. The LLC structure can shield your other assets from claims arising from an accident. But you have to make sure the insurance is adequate, and that the LLC is properly capitalized. You don't want a court to pierce the veil because you're treating the LLC like a personal piggy bank. Luna: So the LLC is a double win: tax deductions and liability protection, as long as you treat it like a real business. Lucas: Precisely. And it's not just the big jet owners. Even a family with a turboprop, a Pilatus, for example, can use the same structure. The numbers are smaller, but the principles are identical. Luna: Now, you mentioned the FAA earlier. How do the FAA rules interplay with the tax side? Lucas: The FAA has its own set of regulations, particularly around 'dry leases.' In a dry lease, you lease the aircraft without crew. That's different from a 'wet lease' where the crew comes with the plane. If you're using a dry lease structure, the operating entity can claim the full deduction for the lease payments, but you need to ensure that the LLC is the true owner and that the lease is in writing. The FAA also has rules about who can operate the aircraft, and that can affect the tax treatment. For example, if the family member is also the pilot, you need to be careful about how you treat the compensation. Luna: And what if the family member is the pilot? That's common in smaller planes. Lucas: It is. If the principal is a licensed pilot and flies the plane for business, you're allowed to deduct the costs, but you have to be careful with the 'for the convenience of the employer' rule. If the company requires the principal to fly as part of their job duties, then it's more clearly deductible. But if it's more of a perk, the IRS might see it as compensation. So you need to treat it as a business necessity, and you should compensate the pilot—even if it's just a nominal amount—to make it defensible. Luna: That's a subtle trap. But it's one that a good advisor can navigate. Lucas: Absolutely, and that's the value of planning. Before you even sign the purchase agreement, you should have your tax advisor review the structure, the projected use, and the documentation. And you should do a cost-benefit analysis. Because in some cases, it might make more sense to charter or to use a management company that handles everything. But for families that fly consistently, owning through an LLC can be a powerful tool. Luna: Let's bring this down to a concrete example. Can you walk us through a family with a forty million net worth and a twelve million jet, logging four hundred hours a year, with sixty percent business use? Lucas: Sure. So the family sets up the LLC, and the operating company leases the jet. The annual lease payment might be, say, one point five million. That's the rent. On the expense side, you have crew, hangar, insurance, maintenance, fuel—let's say that totals two million a year. With sixty percent business use, you can deduct sixty percent of all that: so one point two million of the lease, and one point two million of the operating expenses, giving you a total deduction of two point four million. Luna: And then the bonus depreciation on the purchase price. Lucas: Yes, that's on top. Twelve million times sixty percent is seven point two million, and with bonus depreciation, you can take that in the first year. So in year one, you're looking at nearly ten million in deductions. That can offset a significant amount of business income, potentially saving the family millions in taxes, depending on their bracket. Luna: That's a real number, but it also comes with a real responsibility: you have to actually fly for business, and you have to prove you did. Lucas: Exactly. And that's where the 'concrete impact' comes in. A properly structured aircraft can be a legitimate business asset, not just a toy. But if you're not willing to keep the logs, it's not worth it. The IRS has a form for this, and they've been known to audit this area aggressively. Luna: You know, this reminds me of something we haven't discussed yet: how to handle the personal use portion. You can't just ignore it. Lucas: Right. The personal use is essentially a fringe benefit, and it should be reported as income to the principal. There are two ways to handle it: you can either have the principal reimburse the company for the personal use, or you can report it as W-2 income. Reimbursement is cleaner because it avoids the income tax, but it requires actual payment. It's a common mistake to just ignore it, and that's a red flag. Luna: So it's a balancing act: maximizing the deductions while properly accounting for the personal element. Lucas: Yes, and that's the art of it. You need to have a clear policy in place from day one. For example, you might designate certain flights as 'business' based on the purpose, and others as 'personal,' and keep those separate. The key is consistency. Luna: I think that's a great note to end on. But before we go, we should mention that if you're getting value from these conversations, consider supporting the show. It's a small gesture, but it genuinely helps us keep these episodes ad-free and accessible. You can do that at buy me a coffee dot com slash fexingo. A couple of dollars a month makes a real difference. Lucas: Yeah, we appreciate that. And this kind of planning is a big part of what we do here. Whether it's jets or any other asset, the goal is to make smart, informed decisions. Thanks for listening. Luna: So, looking ahead, there's another layer to this: the FAA is starting to adapt to new technologies, like remote pilots and electric aircraft. How might that change the tax calculus for a family considering an aircraft in, say, the next five years? Lucas: That's a fascinating question. Electric aircraft could have lower operating costs, but the deduction landscape might shift. The IRS may need to issue new guidance on the depreciation of batteries and electric components. And remote piloting could change the definition of 'business use' if the principal is not physically on board. But for now, the traditional rules still apply, and the key is to stay flexible and keep an eye on regulatory updates. Luna: So even the most traditional strategies are subject to change. That's a good thing to keep in mind. Lucas: It is. And it's why we keep having these conversations. The tools evolve, but the principles—structure, documentation, and intent—remain constant.