nbaa Business Aviation Taxes Seminar Resource

Transcription

1 Dedicated to helping business achieve its highest goals. nbaa Business Aviation Taxes Seminar Resource Glossary of Aviation Tax, Accounting and Regulatory Terms April 21, 2014 This glossary is intended to provide attendees with an introduction to the terms frequently used in aviation tax, accounting and regulatory discussions. Readers are cautioned that this glossary is not intended to provide more than a general definition of and introduction to the use of these terms, and there is no substitute for obtaining guidance from aviation legal and tax advisors concerning their meaning in a given context. Further, this glossary was compiled as of March 2014, and does not incorporate statutes, regulations or guidance released after such date. Table of Contents Types of Legal Entities...2 Types of Transactions...3 Types of Aircraft Operations...4 Laws, Regulations and Administrative Interpretations...4 Transportation/Fuel Excise Taxes...5 Income Taxes...6 State Taxes...9 FAA/DOT Regulatory Concepts...9 safety & aircraft operations legislative & regulatory advocacy networking & commerce education & career development business management resources National Business Aviation Association 1200 G Street NW, Suite 1100 Washington, DC (202)

2 Types of Legal Entities Citizen of the United States: An FAA registration concept, which means (A) an individual who is a citizen of the United States; (B) a partnership each of whose partners is an individual who is a citizen of the United States; or (C) a domestic corporation whose president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, which is under the actual control of citizens of the United States, and in which at least 75 percent of the voting interest is owned or controlled by persons that are citizens of the United States. Generally, only a Citizen of the United States is eligible to register an aircraft with the FAA. Corporation: An entity incorporated under state law, owned by stockholders and overseen by a board of directors. For income tax purpose, a Corporation is generally classified as either a C Corporation or an S Corporation. C Corporation: A corporation other than an S corporation. Called a C Corporation because the income taxation of these corporations is governed by Subchapter C, Chapter 1, Subtitle A of the Internal Revenue Code. Disregarded Entity: An entity that is disregarded for income tax purposes. Examples include a Sole Proprietorship, a Single Member LLC, a Grantor Trust and a Qualified Subchapter S Subsidiary. Flight Department Company: A sole purpose company engaged in no business other than operating aircraft, whether the company owns or leases the aircraft. Grantor Trust: For income tax purposes, a revocable trust where the Grantor/Trustor who forms the trust retains control over the trust assets. A Grantor Trust is a Disregarded Entity. Grantor/Trustor: The person who forms and contributes the assets to a trust. Individual: A single human being. Limited Liability Company (LLC): A legal entity owned by members and managed by one or more members or a manager, offering the liability protection of a corporation. An LLC with two or more members is generally treated as a partnership for income tax purposes. An LLC with only one member usually is a Disregarded Entity. Owner Trust: For FAA purposes, a trust which is created with a United States citizen trustee to enable an aircraft to be registered at the FAA. The Grantor/Trustor is frequently the beneficiary of the trust. The aircraft owned by the trust is registered at the FAA to [ABC Trust], as trustee and a copy of the trust agreement is filed with the FAA. Partnership: An association of two or more persons formed for the purpose of obtaining and sharing profits. For income tax purposes, treated as a Pass-Through Entity. Pass-through Entity: For income tax purposes, an entity whose taxable income is not taxed at the entity level, but is passed through and taxed to the owner(s). Examples include a partnership, an S corporation and a multi-member LLC. Person: An individual or entity, including an individual, corporation, LLC, trust or partnership. Qualified Subchapter S Subsidiary (QSSS): A wholly-owned subsidiary of an S Corporation. For income tax purposes, treated as a Disregarded Entity. S Corporation: A corporation for which an election has been made for income tax purposes allowing the corporation to be taxed as a Pass-Through Entity. Called an S Corporation because the income taxation of these corporations is governed by Subchapter S, Chapter 1, Subtitle A of the Internal Revenue Code. Single Member LLC (SMLLC): A LLC which has only one member and ordinarily is treated as a Disregarded Entity for income tax purposes. Alternatively, a SMLLC can be treated as a C Corporation or an S Corporation. Single Purpose Entity (SPE) or Sole Purpose Company: A company which is formed for only one purpose. In the aviation business, this purpose is generally the ownership and/or operation of an aircraft. 2

3 Sole Proprietorship: An unincorporated business conducted by an individual. For income tax purposes, treated as a Disregarded Entity. Trust: A device for separating legal ownership (held by the Trustee) from beneficial ownership (held by the beneficiaries). The Trustee holds legal title to and manages and distributes the Trust s assets, in accordance with the directions of the Grantor/ Trustor, for the benefit of the beneficiaries. Trustee: The person (usually an individual or trust company) holding legal title to the assets of a Trust with responsibility for managing the assets of the Trust. Voting Trust: For FAA purposes, a trust in which the voting power of the shares of stock of a domestic corporation is held by a trustee that is a U.S. citizen pursuant to a written agreement filed with the FAA enabling the corporation to register an aircraft with the FAA. If at least 75% of the voting power is owned and controlled by a citizen of the United States, a company that otherwise qualifies as a citizen of the United States can register aircraft at the FAA in its own name. Types of Transactions Aircraft Management Agreement: An agreement between a person with possession of an aircraft and an aircraft management company whereby the management company is retained to assist the person with the operation of the aircraft under Part 91 of the FARs. Capital or Financing Aircraft Lease: A lease where the lessee is considered the owner of the aircraft for tax, financial accounting and FAA registration purposes. Charter Agreement: An agreement under which the holder of an FAA air carrier certificate operates the aircraft for charter flights. Charter Management Agreement: An agreement, usually a lease, making an aircraft available to the holder of an FAA air carrier certificate so that the certificate holder can operate the aircraft for charter flights. Co-Ownership or Shared Ownership: An arrangement whereby there is more than one registered owner of an aircraft. Typically refers to an arrangement where each co-owner operates the aircraft for itself (as opposed to joint ownership where one registered owner operates for the other registered owners and is reimbursed for the costs associated with operating for the other registered owners). Dry Lease: The transfer of possession and use of, but not title to, an aircraft, without crew (directly or indirectly). Fractional Program: A program in which (i) a person purchases and becomes the registered owner of an interest in an aircraft, (ii) the owners of that aircraft agree to include that aircraft in a pool of aircraft to be available to owners when the aircraft in which they own an interest is unavailable, (iii) each of the owners of each aircraft agree to use a common management company pursuant to separate management agreements which, in most instances, contain the details of the fractional program. The manager must have management specifications issued by the FAA under Subpart K of FAR Part 91 in order to run a fractional program. Interchange: An arrangement pursuant to a written agreement defined in FAR (c) whereby a person leases his airplane to another person in exchange for equal time, when needed, on the other person s airplane and a reimbursement is permitted up to the difference between the cost of owning, operating and maintaining the two airplanes. Joint Ownership: Authorized by FAR (b)(6) and defined in FAR (c) as an arrangement in which an airplane is owned by two or more persons all of whom are registered owners with the FAA where one of the registered joint owners employs and furnishes the flight crew for that airplane and each of the registered joint owners pays a share of airplane expenses pursuant to a written agreement. Lease: The transfer of possession and use, but not title to, an aircraft or other asset. 3

4 Lessor: A person with legal title to an aircraft or other asset who leases the asset to another person. Lessee: A person who obtains possession of, but not title to, an aircraft or other asset by leasing it from a lessor. Operating or Tax Aircraft Lease: A Lease where the lessor is considered the owner of the aircraft for tax, financial accounting and FAA registration purposes. Synthetic Lease: A lease which is considered an Operating Lease for accounting purposes and a Capital Lease for tax purposes. Time Share: A wet lease authorized by FAR (b)(6) and defined by FAR (c)(1) which permits the operator to be reimbursed for twice the cost of fuel and certain stated incidental expenses as listed in FAR (d). Wet Lease: Under FAR 119.3, the lease of an aircraft with at least one crew member. A Wet Lease often does not purport to transfer possession of the aircraft, in which case it is not a Dry Lease or an Operating Lease. Types of Aircraft Operations Aviation Fuel: Any liquid, other than gasoline or diesel fuel, that is suitable for use as a fuel in an aircraft. Aviation Gasoline (Avgas): A specialty gasoline product used in piston-powered aircraft. Based: Generally the place where the aircraft is primarily parked or hangared between trips. Based and Primarily Used: Under FAR 47.9, an aircraft is primarily used in the United States if at least 60% of the flight hours of the aircraft are incurred on non-stop trips between two points in the United States in every six-month period. If an aircraft is owned by a corporation organized under the laws of the United States and meets the based and primarily used requirement, the aircraft can be registered in the name of that company in spite of the company not being a citizen of the United States. Capital Costs: The ownership costs of the aircraft and related equipment, including the costs to purchase the asset. Direct Operating Costs (DOC): The direct costs associated with a particular flight, including the cost of fuel, landing fees, parking fees, crew travel expenses, hourly maintenance program costs, flight phone charges and catering. Fixed Costs: The costs associated with the ownership and operation of an aircraft payable without regard to any particular flight (and without regard to whether the aircraft is even operated), such as crew salaries, hangar rent, insurance and property taxes. Large Aircraft: Under FAR 1.1, an aircraft with a maximum certified takeoff weight set forth in its Type Certificate in excess of 12,500 pounds. Mile: A nautical mile or a statute mile, depending on the context. A nautical mile is approximately 15% longer than a statute mile. Laws, Regulations and Administrative Interpretations Advisory Circular: An information release published by the FAA stating the agency s position and providing guidance on a given topic. Chief Counsel Advisory (CCA): Written advice or instructions prepared by the Office of Chief Counsel and issued to field or service center employees of the IRS or Office of Chief Counsel. The document should not be used or cited as precedent. FARs: The Federal Aviation Regulations promulgated by the FAA. 4

5 Interpretation: A letter from an official at the FAA providing guidance to a particular person requesting advice regarding the interpretation of FAA laws and regulations in a given situation. IRC or Code: The Internal Revenue Code of the United States. NTSB: National Transportation Safety Board, a government board created to investigate civil aircraft and other transportation accidents. Private Ruling or Private Letter Ruling: A ruling by the IRS which is addressed only to the person requesting it and which may not be used by or against other taxpayers. Regulation: A written interpretation of the law promulgated by the government agency charged with administering and enforcing the law. Revenue Ruling: A public IRS interpretation of the law which may be relied on by both taxpayers and the government. Revenue Procedure (Rev. Proc.): A public IRS statement of tax procedure which may be relied on by both taxpayers and the government and generally containing return filing or other instructions about an IRS position. Ruling: Written guidance from the tax or other governmental authority which indicates how laws should be applied to a particular situation. Technical Advice Memorandum: A private ruling from the IRS which is requested by an auditor. Transportation/Fuel Excise Taxes Sec. 4041: Section of the IRC that imposes tax and provides other rules on the purchase of aviation fuels. Sec. 4083(b): Section of the IRC that defines commercial aviation from a tax perspective. Sec. 4261: Section of the IRC that imposes tax on transportation of persons. Sec. 4262: Section of the IRC that defines taxable transportation. Sec. 4282: Section of the IRC that defines tax rules for Affiliated Group members. Sec. 6427(l): Section of the IRC that provides credits for fuel tax not used for taxable aviation purposes. Affiliated Group: A group of corporations which are at least 80% owned by a common parent company and file a consolidated income tax return. Amounts paid for transportation by one member of an Affiliated Group to another are not subject to the Transportation Tax. Domestic Segment: A flight segment consisting of one take-off and one landing, which begins and ends in the United States or the 225-mile zone. Head Tax: The portion of the Transportation Tax which is a flat fee imposed on a passenger. Percentage Tax or Ticket Tax: The portion of the Transportation Tax which is imposed as a percentage of the amount paid for taxable transportation. Possessions: Territories under the administration of the United States, such as Puerto Rico. Possession, Command and Control: The test employed by the IRS to determine who is in control of an aircraft for Transportation Tax purposes, generally based on factors such as who owns the aircraft, pays for the flight crew, oversees and provides maintenance, controls scheduling, maintains insurance and pays aircraft expenses. Segment Tax: The portion of the Transportation Tax which is a flat fee imposed on a Domestic Segment. 5

6 Transportation Tax: The federal excise tax (FET) imposed on the commercial transportation of persons by air. United States: The fifty states, including the District of Columbia. 225-Mile Zone: That portion of Canada and Mexico that is not more than 225 statute miles from the nearest point in the continental United States. Uninterrupted Transportation: Transportation by air in which there is no break of more than 12 hours between flights. Income Taxes Sec. 61: Section of the IRC that defines income subject to tax, which includes the value of certain fringe benefits. Sec. 132: Section of the IRC that allows exclusion of certain fringe benefits from income, including working condition fringe benefits. Sec. 162: Section of the IRC that allows deduction of business expenses. Sec. 167: Section of the IRC that allows capital expenses to be depreciated (see Sec. 263). Sec. 168: Section of the IRC that allows depreciation to be computed using modified accelerated cost recovery system (MACRS), including alternate depreciation system (ADS). Sec. 179: Section of the IRC that allows current deduction of certain capital expenses. Sec. 183: Section of the IRC covering hobby loss rules which disallow deduction of losses from an activity which is not for profit. Sec. 262: Section of the IRC providing general rules disallowing deduction of personal, living and family expenses. Sec. 263: Section of the IRC providing general rules prohibiting current deduction of capital expenses, such as the purchase price of an aircraft. Sec. 274: Section of the IRC covering the T&E rules which disallow deduction of certain travel and entertainment expenses and imposes documentation requirements. Sec. 280F: Section of the IRC that limits certain aircraft deductions. Sec. 465: Section of the IRC dealing with at risk rules which limit deduction of costs by a borrower who is not at risk. Sec. 469: Section of the IRC that limits current deduction of passive activity losses. Sec. 1031: Section of the IRC dealing with like kind exchange rules which allow deferral of gain from exchange of depreciable property. Sec. 1245: Section of the IRC which requires recapture of depreciation deductions on sale of depreciable asset. Accelerated Depreciation: A depreciation method which results in a greater portion of the cost of the asset being deducted for income tax purposes in the first years, in contrast to a straight-line depreciation method. Adjusted Basis: The Basis of an asset as increased by additional Capital Expenditures and decreased by depreciation deductions taken for income tax purposes. Aggregation (Grouping) Rules: Rules allowing the grouping of the taxpayer s business activities so that passive activity losses (PALs) can be deducted as part of a larger economic unit. Aircraft Multiplier: Under the SIFL rules, a multiplier which is used to calculate the personal use value to reflect the size of the aircraft and the status of the employee (as a control employee or non-control employee ). 6

7 Alternative Depreciation System (ADS): A depreciation method under which the depreciation deduction is computed using the straight line method over the class life specified in the IRS Regulations. At-Risk Rules: Rules which limit taxpayer deductions to the amount at risk in the activity. Asset Class: Assets divided by asset class or business, as shown on tables provided by the IRS. Aircraft used primarily under Part 91 are in one class and assets used primarily in air transport and commercial aircraft are in another. Basis: For tax purposes, the initial cost of an asset, generally the purchase price paid. Basis may include certain expenses related to the cost of acquiring the asset, such as shipping expense. Basis is the starting point for computing Adjusted Basis. Bonus Depreciation: A form of Accelerated Depreciation available to taxpayers qualifying for MACRS permitting as much as 100% of the cost of an asset to be depreciated in the year the asset is placed in service. Business Use: Use of property in connection with the trade or business of the owner or operator. Capital Expenditure: An expenditure for the purchase of a capital asset or for work done on a capital asset which increases the value of the asset or extends its useful life. Compensatory Use: Personal use of property as a fringe benefit, which is treated as additional compensation to the user (usually under the SIFL Rules). Control Employee: Under the SIFL Rules, a person who is: (1) an officer (limited to the lesser of 10 employees or 1% of all employees); (2) a highly compensated employee (limited to the top 50); (3) an owner (5% or more); or (4) a director. Forward Exchange: A like-kind exchange where the taxpayer transfers the relinquished property, and assigns the sales proceeds to a Qualified Intermediary which uses the proceeds to acquire the replacement property, sometimes months later. Depreciation: The reduction of the Basis of an asset over its Depreciable Life for accounting or income tax purposes. Depreciable Life: The period of years over which an asset will be depreciated. Depreciation Recapture: The rule which results in the gain from the sale of a depreciable asset being treated as ordinary income to the extent that the Basis was reduced by previous depreciation deductions. Entertainment Activity: An activity generally considered to constitute entertainment, recreation or amusement, such as attending theaters, country clubs, golf and athletic clubs, sporting events and on hunting, fishing, vacation and similar trips. Entertainment Disallowance: The disallowance of deductions for expenses associated with certain entertainment activities. 40% Rule: The depreciation rule requiring the use of the Mid-Quarter Convention when over 40% of the depreciable personal property of the taxpayer is placed in service in the last 3 months of the taxable year. Fringe Benefit: A non-cash benefit provided by an employer to an employee as compensation for services. Half-Year Convention: For income tax purposes, a depreciation convention which assumes that the asset was acquired at the midpoint of the tax year. Hitchhiker Rule: Under the SIFL rules, a rule which prevents imputation of income for personal flights taken where over 50% of the seating capacity, not 50% of the passengers on board -- is occupied by business travelers. Hobby Loss: An expense or loss resulting from an activity not engaged in for profit. Like-Kind Exchange (1031 Exchange): An exchange of property for property of a like kind pursuant to I.R.C. section Listed Property: Property, including aircraft, which are subject to special tax rules regarding the available methods of depreciation. 7

8 Material Participation: A level of participation in an activity, measured annually, in which an individual participates on a regular, continuous and substantial basis. This is a Passive Activity Loss concept. Mid-Quarter Convention: A depreciation convention which assumes that an asset is placed in service at the midpoint of a tax quarter. Use of this convention is required when the 40% Rule applies. Modified Accelerated Cost Recovery System (MACRS): An Accelerated Deprecation method under which depreciation formulas (not deductible amounts) are prescribed which have the effect of front-loading depreciation deductions. Ordinary and Necessary Business Expense: An expense which is reasonable, appropriate and helpful to the business. Passive Activity Loss (PAL): A loss resulting from a Passive Activity. Passive Activity: A rental activity or other business activity in which the taxpayer does not materially participate. Personal Non-Entertainment Use: Use of an aircraft provided by a company to a passenger other than for business of the company or an entertainment activity of the passenger. Personal Use: Use of an aircraft provided by a company other than for the business of the company. Qualified Business Use: Use of an aircraft in a trade or business other than (i) leasing the aircraft to a 5% owner or related person; (ii) use of the aircraft to provide compensation for services to a 5% owner or related person; (iii) use of the aircraft to provide compensation for services to a person other than a 5% owner or related person if not treated as income to such owner or person. If more than 25% of the use of an aircraft during a taxable year is Business Use that does not include any of the three exceptions noted above, all of the use of the aircraft for those three purposes are treated as Qualified Business Use. Qualified Intermediary: An intermediary which meets the IRS definition of an independent intermediary for purposes of effecting a Like-Kind Exchange. Relinquished Property: The property which is given up by the taxpayer in a Like-Kind Exchange. Replacement Property: The property which is received by the taxpayer in a like-kind exchange. Repairs: Work done on a capital asset which does not increase the value of the asset above the original investment or extend the useful life of the asset. Reverse Exchange: A Like-Kind Exchange where the taxpayer transfers their relinquished property and then immediately transfers the relinquished property, ordinarily to an affiliate of a Qualified Intermediary. Short-Year Limitation: The depreciation rule which limits the first year depreciation where property is purchased by a corporation or partnership formed during the taxable year. Standard Industry Fare Level (SIFL) Rates: The SIFL rates, as published every six months by the Department of Transportation. SIFL Rules: The special rules used to value personal flights taken in company aircraft or aircraft provided by the company. Simultaneous Exchange: A Like-Kind Exchange where the taxpayer makes a simultaneous exchange of the relinquished property for the replacement property. Straight Line Depreciation: A depreciation method which deducts the cost of an asset in equal increments over the asset s depreciable life. Tax Year: The annual period for which income is reported, generally the calendar year. Trade or Business: An enterprise which is conducted for the purpose of producing income from selling goods or providing services. 8

9 Working Condition Fringe Benefit: Any property or service provided to an employee to the extent that, if the employee paid for the property or service, the amount paid would be allowable as a business deduction. State Taxes Ad Valorem or Property Tax: An annual tax imposed on the value of property located in the State. Aircraft Registration Tax: An annual fee imposed on aircraft located in the State. This tax is often in lieu of the ad valorem or property tax. Apportionment: The allocation of a portion of income or property value to a State, generally for the purpose of insuring that tax is paid only on activity properly allocable to the State. Commercial Use Exemption: A common sales and use tax exemption for aircraft used in primarily or exclusively in commercial operations. Generally includes aircraft used in airline and charter operations. Credit for Taxes Paid to Other States: Instead of using apportionment, a State may give credit for taxes paid to other States. Fuel Tax: A tax on the sale of fuel in the State. Imposed either as a separate tax or as part of the general sales tax. Flyaway Exemption: A common sales tax exemption for aircraft removed from the State shortly after the sale. Resale Exclusion or Exemption: A sales and use tax exclusion or exemption for aircraft purchased or held exclusively for resale or, in many cases, lease to others. Sales Tax: A tax imposed on the sale of property in the State which can take the form of an excise tax or a business tax. Trade-In Exemption: A sales and use tax exemption that reduces the taxable amount by the value of property given in trade. Use Tax: A tax imposed on the use of property in the State. A backstop to the Sales Tax. FAA/DOT Regulatory Concepts Commercial Transportation/Part 135: Air transportation of passengers or freight operated or required to be operated pursuant to an air carrier or commercial operating certificate issued by the FAA and authority from the Department of Transportation. Common Carriage: A holding out of a willingness to transport persons or property from place to place by air for compensation or hire. Compensation for Air Transportation: Any benefit or remuneration, with or without profit, and whether or not in cash, received by the provider of air transportation for such transportation. Demonstration Flight: Under FAR (b)(3), a flight for the demonstration of an airplane to prospective customers. Permits reimbursement in the same amount as permitted for Time Sharing as reflected in FAR (d). Nichols Opinion or Revised Schwab Opinion: FAA interpretation permitting certain corporate employees and officials to pay a fully allocated cost for use of company-provided aircraft operated under Part 91 for non-business flights without entering into a Time Sharing Agreement or obtaining a commercial certificate from the FAA. Operational Control: As defined in FAR 1.1, with respect to a flight, the exercise of authority over initiating, conducting or terminating the flight. Private Carriage/Part 91: Air transportation of passengers or freight arranged privately and not through common carriage (i.e. there is no holding out ). Truth-In-Leasing: FAA regulations defining leasing and specifying language that must be included in leases of large (over 12,500 lbs) aircraft. 9