DA40NG 2022 Leaseback advices

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Boatguy
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Re: DA40NG 2022 Leaseback advices

Post by Boatguy »

Colin wrote: Sat Jan 14, 2023 4:54 pm I documented like crazy, flew more than half the flights interstate (Safe Harbor rule, so no state sales tax on the purchase)
Minor clarification. In California it is the Interstate Commerce Exemption (aka ICE) which requires that 1) possession is taken outside of CA and 2) the majority of the hours in the six months after the plane first enters CA are interstate and for a business purpose. Colin's example of commuting to Vegas is a perfect case as every flight to Vegas would be interstate and for a business purpose.

Note that the owner controls both the numerator and denominator that determines the "majority". In an extreme case, if there was only flight, and it was interstate, the criteria would be satisfied.

There are services, some are attorneys, others not, that will instruct and facilitate the documentation, file the exemption with the state, etc.

It does require meticulous documentation, but the business purpose need not be a simple or clear cut as Colin's example. This is strictly about CA Use Tax.

The "Hobby Rule" is for the IRS and refers to the requirement that a majority of the hours flown be for a business purpose in order to deduct expenses, including depreciation, on Federal income taxes. The percentage of business use must be more than 50% and then that percentage of expenses may be considered a business expense.
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shorton
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Re: DA40NG 2022 Leaseback advices

Post by shorton »

Hobby loss (IRC section 183) is an enormous issue for owners leasing aircraft, as well as the passive activity rule (IRC section 469). The law is cumbersome and voluminous in these areas and is the primary sword the IRS will wield when auditing an owner of a leased aircraft.

The hobby loss test has nothing to do with the percentage of business use. It's possible to have a situation where you document nearly 100% business use but still lose all of your aircraft expense deductions due to the hobby rule. This unfortunate result could come from any type of use, but is a particular concern with leasebacks and dry leasing structures.

From a federal tax standpoint, 50% business use is only relevant as to the method of depreciation. In the grand scheme of things, it's not a big deal. Many owners have far less than 50% business use and can deduct nearly 100% of the expenses of aircraft ownership (purchase price, fuel, maintenance, hangar, insurance, etc).

Before 2017, the application of the hobby loss rule was not necessarily the end of the world. With the new 2017 tax law, you will lose ALL of your hobby expenses but have to recognize ALL of the hobby income. Imagine leasing your plane and earning 100,000 a year in rental revenue but not being able to offset that income with ANY aircraft expenses. YIKES! that would certainly kill the benefit of renting your aircraft.

IRS enforcement has been a quiet topic over the past decade, very very few aircraft owners (or anyone else for that matter) have been subject to audit by the IRS. I remember well the 2008-2010 period when about 1/3 of recent aircraft buyers received an IRS audit notice and my aviation tax practice became as much audit work as transactional work. With the announced hiring of 81,000 new IRS agents, I think we are likely on our way to revisit that time. Tread carefully!
Scott Horton, JD CPA
ATP, FAA Gold Seal CFI, CFII, MEI
https://orangecountyflightinstruction.com
KSNA, Orange County, CA
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