Housekeeping Issues. Wolcott Aviation Seminars, LLC. Copyright 2013 Wolcott Aviation Seminars, LLC

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1 Sue Folkringa, CPA, MBA Commercial Pilot, AS/MEL, Instrument Airplane Preparing Tax Returns For Individuals That Own Aircraft 1 Wolcott Aviation Seminars, LLC Housekeeping Issues Wolcott Aviation Seminars, LLC If you are unable to hear the audio through your speakers or prefer to listen via phone, please dial: Access code Copyright 1

2 Today s Webinar: Webinar will be approximately 60 minutes in length Course materials have been ed to you but in case you do not have them: cpa.com/webinars/1080 Call our office if you need assistance (866) Please ask questions during the webinar: 5 We get asked many questions during the webinar.. We try to answer all questions asked during the webinar If your question has not been answered by the end of the webinar, please don t disconnect when the webinar ends We may ask you to contact us after the webinar if your issue is too complex to answer using the chat feature 6 Copyright 2

3 Reminders: You must be present for the entire program for CLE, CPE or an Attendance Certificate. Polls will be provided during the program to confirm attendance. Complete all polls for attendance credit. Group Internet Based Programs sponsor ID Wolcott Aviation Seminars, LLC is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, Web site: 7 Reminders: 8 Today s Presenters: Jed R. Wolcott, CPA, MBA & Sue E. Folkringa, CPA, MBA 9 Copyright 3

4 What We Will Cover Today Today s webinar will cover preparation of tax returns for aircraft owned by individuals (includes aircraft in a singlemember LLC owned by the taxpayer) 10 What We Will Cover Today Many owners are reluctant to take deductions they are entitled to from the business use of their aircraft The webinar provides the basic information to assist the owner pilot, CPA, or tax professional in preparing the tax returns to maximize tax deductions from the business use of aircraft Not all inclusive high points only Presentation is not an alternative to professional assistance 11 Justify Business Use of Aircraft Split use is normal and OK Types of use: Business Personal Leasing Maintenance, other 12 Copyright 4

5 Topics Covered in Webinar Preparing the data Allocating costs and expenses from split use Calculating depreciation Preparing the tax returns by activity Wrap up 13 General Reporting Principles Separate activities and match income with expenses Report active use within an operating company Allocate depreciation by activity Allocate maintenance by activity Note: Owner flight training is not deductible 14 Preparing the Data 15 Copyright 5

6 Owner Tax Information Taxpayer is a commercial real estate broker, owns a Pilatus in a single member LLC. Aircraft cost $1,200,000 in Taxpayer owns a real estate brokerage office in Tampa; sells commercial real estate in Florida and Georgia Leases the Pilatus to a Part 135 operator when not using the aircraft 16 Tax Return Overview Real Estate business reports on active (no limitations) Schedule C along with costs, expenses and depreciation from business use of the aircraft. Charter income and pro rata charter costs and expenses are reported on passive (limitations) Schedule C. Maintenance flight use is prorated between active and passive uses. 17 Taxpayer s Use of the Aircraft Type of Use 2012 Hours Owner s R.E. company 90 Charter Operator 60 Maintenance 10 Personal 40 Total 2012 Use Copyright 6

7 Tax Return Flow Form 1040 Personal Return Schedule SE Form 6251 AMT Schedule A Itemized Deductions Schedule C Active Real Estate Business Aircraft LLC Schedule C Passive Leasing Form 8582 PAL Form 4562 Depreciation 19 Organizing the Data Organize income, costs and expenses by type: Income Direct operating costs Fuel & hourly maintenance, and other costs directly related to the operation of the aircraft Fixed and ownership costs Insurance, interest, hangar, expenses to maintain license, subscriptions, fees Depreciation 20 Organizing the Data We recommend organizing the financial data of the aircraft using either: QuickBooks All information is easily manipulated to prepare financial statements Once information is properly entered, aircraft owner need only send file to accountant to upload to tax preparation software. Still requires data to be broken out by flight type Easy to set up with little understanding of accounting concepts If not set up properly, may need accountant to correct Excel Spreadsheet Data is not easily manipulated to create financial statements Accountant will need to manipulate the data to prepare tax return Easy to set up with little to no accounting knowledge 21 Copyright 7

8 Trial Balance 22 Allocating Costs and Expenses from Split Use 23 Flight Tax Systems General Flight Report 24 Copyright 8

9 Taxpayer s Use of the Aircraft Type of Use Hours Maintenance Allocation Restated Hours Percent Use Owner s R.E. Company % Charter Operator % Maintenance Personal % Total 2012 Use % Maintenance prorate (or simply ignore same effect) Owner training; not deductible. Prorate and disallow, same as personal use Crew training; deductible. Prorate same as maintenance. 25 Income Statement Allocation 26 Depreciation 27 Copyright 9

10 Depreciation Mixed Use Taxpayer may use accelerated depreciation (MACRS) if overall business use exceeds 50% If less than 50% business use, use straight line depreciation If mixed use (partial 91, partial 135), the depreciation method of the predominant use prevails 28 Depreciation Aircraft used at least 50% for business: MACRS 5 year for Part 91 use aircraft MACRS 7 year for Part 135 use aircraft Aircraft used less than 50% for business: ADS 6 year for Part 91 use aircraft ADS 12 year for Part 135 use aircraft Mid quarter convention for aircraft placed in service during 4 th quarter MACRS Modified Accelerated Cost Recovery system (Acellerated) ADS Alternative Depreciation System (Straight line) 29 Depreciation MACRS Accelerated Year 5 Year Half Year Convention 7 Year Half Year Convention 5 Year Mid Quarter Convention 7 Year Mid Quarter Convention % 14.29% 5.00% 3.57% % 24.49% 38.00% 27.55% % 17.49% 22.80% 19.68% % 12.49% 13.98% 14.06% % 8.93% 10.94% 10.04% % 8.92% 9.58% 8.73% % 8.73% % 7.64% Part 91 Part 135 Part 91 Part 135 For Aircraft acquired during 1 st 9 months of fiscal year For Aircraft acquired during 4 th quarter 30 Copyright 10

11 Depreciation ADS Straight Line 6 Year 12 Year 6 Year 12 Year Year Half Year Convention Half Year Convention Mid Quarter Convention Mid Quarter Convention % 4.17% 2.08% 1.04% % 8.33% 16.67% 8.33% % 8.33% 16.66% 8.33% % 8.33% 16.67% 8.34% % 8.34% 14.58% 8.33% % 8.34% % 8.33% % 8.34% % 8.33% % 8.34% % 7.29% Part 91 Part 135 Part 91 Part 135 For Aircraft acquired during 1 st 9 months of fiscal year For Aircraft acquired during 4 th quarter 31 Depreciation Second year of ownership Use: Business 47.4% Charter 31.6% Total 79.0% Business use exceeds 50%; owner may take MACRS MACRS Year 2 = 32% $1,200,000 x 0.32 = $384,000 Depreciation expense for Depreciation Form Copyright 11

12 Business use = 79%: MACRS use permitted Total Business 47.4% Charter 31.6% Non Bus 21% 2 nd Yr. Depreciation $384,000 $182,016 $121,344 $80,640 $384,000 x 79% = $303,360 regular depreciation 34 Income Statement Allocation 35 Preparing the Tax Return: Reporting Business Use 36 Copyright 12

13 Schedule C Active Report owner s active business + aircraft use in the RE business on active Schedule C Combine aircraft expenses with income and expenses from owner s real estate company Include pro rata costs, expenses and depreciation from non business use If you have depreciable assets for the RE business, report on separate depreciation schedule, Form 4562, from the Form 4562 for the aircraft 37 Tax Return Flow Form 1040 Personal Return Schedule SE Form 6251 AMT Schedule A Itemized Deductions Schedule C Active Real Estate Business Combine Real Estate business, aircraft use and non-business use on the Schedule C Aircraft LLC Schedule C Passive Leasing Form 8582 PAL Form 4562 Depreciation Copyright 13

14 Income Statement Allocation 40 Personal Use For individual owned aircraft, owner has the option of reporting by: SIFL and cost disallowance rules (occupied seat hours or occupied seat miles) Primary purpose reporting (pro rate and deduct costs and depreciation from the non business flights) Copyright 14

15 Schedule C Active 43 Depreciation Tracking* (Assuming same % usage for year 1 and year 2) Year Total Depreciation Non Business 21% ,000 $50, ,000 80,640 Total $624,000 $131,040 Note: Disallowed depreciation is not lost. It will add to basis when the aircraft is sold Depreciation not taken Track disallowed depreciation on workpapers year-to-year * Same tracking must be done for AMT depreciation 44 Preparing the Tax Return: Reporting Passive Leasing 45 Copyright 15

16 Tax Return Flow Form 1040 Personal Return Schedule SE Form 6251 AMT Schedule A Itemized Deductions Schedule C Active Real Estate Business Aircraft LLC Schedule C Passive Leasing Form 8582 PAL Form 4562 Depreciation 46 Aircraft on Schedule C Passive losses result from leasing, or when there is insufficient owner participation Leasing is when someone other than the owner uses the aircraft for a fee Passive aircraft activities include lease to flight school, aircraft rental, and charter operations Both leasing and owner participation rules must be overcome to make passive loss active 47 Passive Loss Limitations Depreciation often results in a tax loss Deduct passive losses only to the extent of passive income; remaining losses are suspended and not deductible in the current period Report passive leasing use on separate Schedule C 48 Copyright 16

17 Income Statement Allocation 49 Aircraft on Schedule C Passive 50 Passive Loss Limitation Form Copyright 17

18 Putting It All Together 52 Additional Owner Information Owner reports married with 3 dependents, spouse has no income Home mortgage interest of $18,000, real estate taxes of $6, Remaining Forms to Prepare Schedule SE Self employment tax Itemized Deductions Sch. A Alternative Minimum Tax Form 6251 Form Copyright 18

19 Self Employment Tax: Schedule SE 55 Itemized Deductions: Schedule A 56 AMT Form Copyright 19

20 Business use = 79%: MACRS use permitted Total Business 47.4% Charter 31.6% Non Bus 21% 2 nd Yr. Depreciation $384,000 $182,016 $121,344 $80,640 2 nd Yr. AMT Depr. Adj. $ 78,000 $ 36,972 $ 24,648 $16,380 $384,000 x 79% = $303,360 regular depreciation $78,000 x 79% = $61,620 AMT depreciation adjustment 58 Individual Tax Return: Form Summary Alternative Minimum Tax Preference items encountered by Taxpayer Schedule A taxes Employee Business Expenses from Form 2106 Depreciation PAL depreciation Schedule A Limitations See AMT preference items Passive Activity Loss Limitations Passive activity losses are suspended Depreciation is added back to calculate AMT PAL which created a profit Effective and Marginal Tax rates 33.0% Marginal 40.9% Effective 60 Copyright 20

21 Alternatives MACRS + Itemized Deductions Straight Line + Itemized Deductions Straight Line + Standard Deduction Taxable Income $247,331 $247,329 $247,331 $261,336 Tax 58,526 58,525 58,526 63,147 AMT 22, Total Tax Income Tax $81,499 $81,500 $58,526 $63, Coming in 2013 Additional 0.9% Medicare Tax (Beginning 1/1/2013) Applies to individual s total wages, other compensation & self employment income. $200k/Single, $250k/MFJ and $125k/MFS 3.8% tax on the lesser of: Net investment income or Excess of modified adjusted gross income over the threshold: MFS/Surviving Spouse $250,000 MFS $125,000 All other $200, Wolcott Aviation Seminars, LLC For Further Information: Phone: info@aviation cpa.com Website: cpa.com 63 Copyright 21

22 Wolcott & Associates, P.A. Q & A Session 64 Reminder We are still taking questions using the GoToWebinar chat window If you have a question that hasn t been answered, we will remain connected to the webinar and will answer your question in the order in which it was received 65 Copyright 22