As a wealth manager to individuals, families and their companies, either you do now or eventually you will represent clients that own, lease or otherwise use business aircraft. Thanks to our excellent relationships with wealth management concerns worldwide, over 3 decades we have developed an impressive portfolio of UHNW and HNW clients to whom we provide legal, tax and financial advisory services in connection with their business aviation matters. We are keenly aware of the issues most important to wealth managers in serving their valued clients. The following are several questions we recommend wealth managers have their clients consider.
Does your client hold their aircraft (whole or fractional) in a shell company? If so, it is possible that such arrangement is impermissible under Federal Aviation Regulations (FAR). Such "illegal" operations could bring significant FAA fines, invalidate insurance, and invite plaintiffs' counsel to attempt to pierce the corporate veil, potentially exposing your client's personal assets.
Does your client or its entity receive reimbursements for flight costs? Whether from an affiliate or 3d-party, such payments could be illegal under the FAR, potentially resulting in the same exposures as above.
If your client claims the aircraft as a business asset and deducts expenses (including accelerated depredation), is the aircraft used for non-business flights? The Internal Revenue Code (IRC) imposes significant limitations on the deductibility of expenses for personal flights, particularly if entertainment is involved, where deductions for allocable expenses are almost completely disallowed.
The IRC also regards personal use of the company aircraft as a taxable fringe benefit unless the employee reimburses the company. As discussed above, such reimbursements could be illegal under the FAR. Does your client reimburse the company, or fail properly to impute fringe benefit income? If fringe benefit income is not properly imputed, the company could lose deductions.
In order to avoid having all aircraft expenses disallowed as entertainment expenses, Treasury regulations require that certain detailed records must be kept contemporaneously with flights. These are different from the aviation records required under the FAR. Is your client timely keeping these records and in the proper form?
Does your client lease their aircraft to other parties? Under the IRC's passive loss limitations, leasing is a passive activity. Losses from passive activities may not be used to offset nonpassive income from other activities until the passive activity is disposed of in a taxable transaction.
Fortunately, there are potential workarounds for these and the dozens of other critical, large-dollar issues involved in the acquisition, sale, financing and use of business aircraft. At no cost to your clients , we would be pleased to review your clients' aircraft ownership and operating platforms to ascertain whether their structures are optimized.
Rex E. Reese, Esquire, is a private attorney specializing in business aviation matters. Mr. Reese has handled over 1,000 business aircraft acquisition, sale and financing transactions and is regarded as one of Washington's best tax attorneys. He may be contacted at 703.842.8000, firstname.lastname@example.org, www.jetviser.com.