Housekeeping Issues 12/17/ Wolcott Aviation Seminars, LLC 1 WELCOME. Tax Issues for Owner Pilots. Wolcott Aviation Seminars, LLC

Transcription

1 WELCOME Tax Issues for Owner Pilots December 17, 2013 Sue Folkringa, CPA, MBA Commercial Pilot, AS/MEL, Instrument Airplane Wolcott Aviation Seminars, LLC Housekeeping Issues 2 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

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: Resource Library ID = Call our office if you need Assistance (866) Resource Lookup Please Ask Questions During the Webinar: 6 2

3 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 7 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. National Association of State Boards of Accountancy (NASBA) Group Internet Based Programs sponsor ID Florida Bar Association Continuing Legal Education Accreditation Provider # Reminders: 9 3

4 Following the webinar we invite you to join us for a 15 minute webinar on our aviation tax software called Flight Tax Systems. Flight Tax Systems software will track and calculate the tax reporting requirements explained during this webinar. Attendance is entirely optional. 10 Wolcott & Associates, PA: We are an aviation-dedicated group of CPAs and accounting professionals Our clients are aircraft owners and operators, pilots, and owner-pilots Our practice is limited to the preparation of aircraft income tax returns, state tax matters, IRS audits, structuring aircraft ownership, and related aviation tax and financial matters 11 Today s Presenters: Jed R. Wolcott, CPA, MBA & Sue E. Folkringa, CPA, MBA 12 4

5 Topics 1. Ownership structures 2. What is (and what isn t) business use? 3. Reporting business and non-business use of the aircraft on your tax return 4. Hobby loss trap 5. Renting and leasing issues 6. Depreciation 7. Deducting aircraft expenses by a W-2 employee 8. State tax issues 13 Types of Ownership Structures Aircraft owned by the individual Including a single-member LLC Aircraft owned by operating company S-corp., C-corp., or partnership Operating company uses the aircraft in it s business Files a separate tax return from the owner/pilot Aircraft owned by Special Purpose (SPC) S-corp. or partnership Only asset is the aircraft Files a separate tax return from the owner/pilot 14 Aircraft Owned by the Individual Individual Owner Tax Reporting Report on IRS Schedule C Single-Member LLC FAA Reporting 15 5

6 Single-Member LLC Single-member LLCs (SM-LLCs) are entities that are legally separate from the owner/member Disregarded by IRS - means does not file a separate tax return reports on member s return FAA registration lists the LLC as owner Permits aircraft ownership and registration to be in an entity separate from the owner for liability purposes No tax benefit or drawback to the owner/member 16 Aircraft Owned by Operating Owner Operating Aircraft & Operating Owns Aircraft Used in the Business (Best Practice) 17 Aircraft Owned by Special-Purpose (SPC) Owner Operating Dry Lease Aircraft SPC: S Corp, Partnership Files separate tax return 18 6

7 Ownership Structure Summary Aircraft on 1040 Aircraft in Operating Owner Aircraft in SPC Owner Owner Single Member LLC Aircraft & Operating Aircraft reported on 1040 Operating Dry Lease Aircraft Files separate return from the owner Files separate tax return 19 Topics 1. Ownership structures and their tax consequences 2. What is (and what isn t) business use? 3. Reporting business and non-business use of the aircraft on your tax return 4. Hobby loss trap 5. Renting and leasing issues 6. Depreciation 7. Deducting aircraft expenses by a W-2 employee 8. State tax issues 20 Aircraft Use Must Be Ordinary and Necessary for the Business The ordinary and necessary rules apply to any asset or business segment The aircraft must be incidental to the business The IRS ordinary and necessary business expense standard requires that an expense be: Appropriate Helpful in carrying on the taxpayer s business A common and accepted practice Reasonable in amount Not lavish or exorbitant 21 7

8 What Is Business Use? Questions the IRS auditor will always ask: Is the aircraft truly incidental to the company business, or Is the aircraft an expensive perk for the benefit of the owners and/or company executives? In general: must have a need for air transportation Air transportation need can be best met by private air transportation Aircraft size must be appropriate for the company s use 22 What Is Business Use? Investment activities are not business use Flights to inspect potential business ventures or rental property are subject to reporting as Sec A Itemized Deductions, subject to Alternative Minimum Taxes limitations, 2% floor on AGI, and itemized deduction limitations IRS may try to limit deductions because the aircraft was inappropriate for specific travel requirement Could limit deduction to first class airfare equivalent May substitute reduced hourly operating rate May disallow all costs, expenses and depreciation if IRS considers the aircraft unnecessary or lavish 23 Topics 1. Ownership structures 2. What is (and what isn t) business use? 3. Reporting business and non-business use of the aircraft on your tax return 4. Hobby loss trap 5. Renting and leasing issues 6. Depreciation 7. Deducting aircraft expenses by a W-2 employee 8. State tax issues 24 8

9 Reporting Business Use After August 01, 2012 Old Rules: Owners report use on a per flight basis Deduct business-use costs, expenses and depreciation on a pro rata basis of business use New Rules: Owners and employees report use on a per passenger basis Requires tracking each passenger on every flight leg Your log book is now part of your tax return 25 Reporting Business Use After August 01, 2012 Owners and Employees: Non-business use is treated as a taxable fringe benefit. Calculated fringe benefit posted to W-2 and owner or employee pays income tax Standard Industry Fare Level (SIFL). Most popular method Charter rate reporting Owner or employee reimburses : Must disallow entertainment flight use Requires tracking each passenger on each flight leg Disallowance includes direct operating costs, ownership costs, and depreciation 26 Passenger Flight Types Business passengers are on the aircraft for business purposes of the owner Non-Business Non-Entertainment (NBNE) passengers are on the aircraft for business other than that of the aircraft owner, or as travel companions for the business passengers Entertainment passengers are on the flight for purposes of personal entertainment. Pro-rata costs and depreciation are disallowed. Travel must be taxed as compensation to the owner or employee that invited them on the aircraft

10 Reporting Employee Use in an Operating or SPE Employee s non-business flights are a taxable fringe benefit to the employee Employee (at the company s option) reports either imputed income or reimburses for: NBNE flights Entertainment flights Imputed income is calculated by Standard Industry Fare Level (SIFL). Reimbursement must at least equal SIFL rates to meet the SIFL reporting requirement Failure to observe imputed income rules could cause the company to lose its business aircraft deductions 28 Reporting Employee Use in an Operating or SPE SIFL rates are published by the DOT every 6 months There are separate rates for control (i.e., the boss) and for non-control employees SIFL rates increase by aircraft weight Guests are charged SIFL to the employee SIFL amounts for the year are added to the employee s W-2 29 Standard Industry Fare Level (SIFL) Rates Mileage Range 1 st Half nd Half Miles $ $ ,500 Miles $ $ Over 1,500 Miles $ $ Terminal Charge $48.54 $

11 Aircraft Multiples Maximum Certified Takeoff Weight of the Aircraft Aircraft Multiple for a Control Employee Aircraft Multiple for a Non-Control Employee 6,000 lbs or less 62.5% 15.6% 6,001 10,000 lbs 125% 23.4% 10,001 25,000 lbs 300% 31.3% 25,000 lbs or more 400% 31.3% 31 SIFL Formula Formula Statute Miles X SIFL Rate Sub Total X Aircraft Multiple Sub Total + Add the Terminal Charge Sub Total X # of Passengers SIFL Charge to Employee 32 Disallowing Entertainment Use by the Passengers are tracked separately using seat miles, seat hours, or flight-by-flight miles or hours The company disallows the pro rata percentage of aircraft costs, expenses and depreciation from entertainment passengers The annual disallowance is reduced by SIFL or employee reimbursements (i.e., the company gets credit for SIFL or reimbursements) Track flights by spreadsheet or software 33 11

12 31% 50% Seating Capacity $ $ $ % $ Seat Method Flight-By-Flight Method Flights Only Exempt Non- Flt Statute Total Business Pers Non- Entertain Terminal Imputed Entertain Total Seat Entertain Total Seat Entertain Entertain Leg Date From To Flight Type Hrs Spouse & Control Miles Miles Subtotal Factor Subtotal Subtotal Reimbursed # Miles Pax Pax Ent Pax Pax Miles Charge Income Seat Miles Miles Seat Hours Hours Miles Hours Dependents Guests Flight 1: Business Flights 1 1 1/2/11 STL MDW Business , /3/11 MDW STL Business , Flight 2: Entertainment Flights 2 1 1/10/11 STL ORL Entertainment % ,271-3,496 3, /20/11 ORL STL Entertainment % ,271 2,520 3,496 3, Flight 3: Non-Entertainment Flights 3 1 2/1/11 STL AAO Other Business % /5/11 AAO STL Other Business % Flight 4: Mixed Business & Entertainment Flights, Multi-Leg Flights, With Spouses 4 1 3/10/11 STL DET Mixed % , /11/11 DET HPN Entertainment % ,474-1,952 1, a 3/14/11 HPN DET Entertainment % b 3/14/11 DET STL Business c 3/14/11 HPN STL Entertainment % ,157-1,790 1, Leg 3 Adjustment (2.1) (895) (665) (1.50) Flight 5: Mixed Business & Entertainment Flights; With Customers 5 1 4/5/11 STL FTG Business , /8/11 FTG LAS Entertainment % ,661-3,786 3, /11/11 LAS FTG Entertainment % ,661-3,786 3, /11/11 FTG STL Business , Flight 6: Deadhead Leg on Multi-Leg Flight; 50% Seating Capacity Rule 6 1 4/18/11 STL PDK Mixed % ,904 3, /19/11 PDK HPN Deadhead ,526 5, /20/11 HPN STL Business , Flight 7: Foreign Travel 7 1 5/15/11 STL MBJ Mixed 3.6 1, % ,790-4,755 9, Foreign SIFL 1, /25/11 MBJ STL Mixed 3.6 1, % ,790-4,755 9, Foreign SIFL , Summary: All Other Flights Business , , , ,926 2,520 33, , , % 1.31% 13.77% 17.58% 17.51% 12.37% 14.01% 12/17/2013 FLIGHT INFORMATION SIFL CALCULATION COST DISALLOWANCE 34 Summary Types of Flights and How they Are Reported All Flights Business Non-Business Non-Entertainment Entertainment 35 Summary Types of Flights and How they Are Reported All Flights Business Not Subject to SIFL Deductible Non-Business Non-Entertainment Entertainment 36 12

13 Summary Types of Flights and How they Are Reported All Flights Business Not Subject to SIFL Deductible Non-Business Non-Entertainment Subject to SIFL Deductible Entertainment 37 Summary Types of Flights and How they Are Reported All Flights Business Not Subject to SIFL Non-Business Non-Entertainment Subject to SIFL Entertainment Subject to SIFL Deductible Deductible NOT Deductible 38 Documentation Rules The owner must keep records for each flight leg Flight date Origin of flight Destination of flight Number of seats available on the aircraft Name of each passenger Relationship of the passenger to the owner or the company, and Whether the passenger was traveling for company business, personal business, or personal entertainment Professional flight crew on the aircraft are not reported Owner-pilots are treated as passengers for IRS reporting 39 13

14 Leasing to the Owner/Pilot to Avoid the Entertainment Disallowance When the aircraft is owned by a company owned by the pilot, consider dry-leasing the aircraft to the owner/pilot for entertainment flights Lease must be at fair market value leasing rates Have a lease written to FAA truth in leasing standards The IRS will disallow if the lease rate is sub-standard Document with 3 rd party industry cost analysis or lease apprasial Aircraft Owned by Operating Owner Dry leases to the owner for Entertainment Flights Owner/Pilot pays all direct costs Owner/Pilot pays FMV lease rate to the company treats all use as business Aircraft & Operating (Best Practice) Operating Owns Aircraft Used in the Business 41 Topics 1. Ownership structures 2. What is (and what isn t) business use? 3. Reporting business and non-business use of the aircraft on your tax return 4. Hobby loss trap 5. Renting and leasing issues 6. Depreciation 7. Deducting aircraft expenses by a W-2 employee 8. State tax issues 42 14

15 Hobby Loss Rules Restricts use of losses against other taxable income if activity is not for profit Hobby loss rules apply to S-corps, partnerships, and 1040 Schedule Cs for individually-owned aircraft IRS presumes activity is a hobby if the activity has losses in 3 out of 5 years Hobby loss rules are dangerous because IRS will limit or disallow all costs and depreciation. Can be big win for IRS 43 Hobby Loss Rules Depreciation can cause multiple years of losses Hobby income is treated as taxable Hobby expenses are reported as an itemized expense subject to limitations, and are subject to Alternative Minimum Tax (AMT) Aircraft in SPCs and reported on Schedule Cs are often hobby loss targets 44 Hobby Loss Rules Example of SPC Hobby Loss Structure Owner Special Purpose Operating Dry Lease Aircraft Reports Losses Hobby Loss Audit Target 45 15

16 Hobby Loss Rules If there are not 3 profitable years out of 5, IRS regulations provide a list of factors to test if an activity is for profit, such as: Manner in which taxpayer carries on the activity Expertise of the taxpayer or advisors Time and effort expended Expectation of future profits Taxpayer s success in carrying on similar activities Taxpayer s history of income or losses with the activity or were losses beyond the taxpayer s control or from startup activities Amount of occasional profits, if any Financial status of the taxpayer Elements of personal pleasure or recreation Hobby Loss Rules Taxpayer may aggregate hobby activity with a profitable activity Owner Operating Dry Lease Aircraft NOTE: Include grouping decision reference in each tax return 47 Topics 1. Ownership structures 2. What is (and what isn t) business use? 3. Reporting business and non-business use of the aircraft on your tax return 4. Hobby loss trap 5. Renting and leasing issues 6. Depreciation 7. Deducting aircraft expenses by a W-2 employee 8. State tax issues 48 16

17 Passive Activity Loss Rules (PAL) Passive loss rules apply to: Leasing activities Activities in which the owner does not materially participate in the activity Either condition will cause a loss to be treated as passive Passive losses will only offset passive income 49 Passive Activity Loss Rules (PAL) The Passive Loss Limitation rules apply to: Individuals Trusts Estates S-Corporations (but generally not C-Corporations) If there is not passive income, then PAL is suspended until: Passive income becomes available, or The aircraft is sold; accumulated PAL will offset taxable gain on the disposition 50 What is Passive Income? Rental income, providing more than 30% of the unadjusted basis is subject to depreciation Income from activities where the taxpayer does not have material participation Gain on disposition of an interest in a passive activity Gain on sale of property used in a passive activity 51 17

18 Types of Passive Use Lease to a 135 charter operator Lease to a flight school Dry lease to another company or individual Dry lease to rental company or FBO Leasing to an affiliated (non-arm s length) operating company 52 Passive Activity Loss Rules Exceptions, Grouping, and Reporting There are 6 exceptions to PAL leasing rules There are 7 tests in the PAL material participation rules PAL grouping rules may overcome the passive activities rules Passive Activity Grouping Taxpayer might group active business activity with a passive activity Owner Operating Dry Lease Aircraft NOTE: Include grouping election in each tax return 54 18

19 11003 Grouping Rules In the past, taxpayers were not required to identify members of the grouping in the tax return(s) For tax years beginning January 25, 2010 and after, taxpayers must file a written statement for: First year of grouping Whenever there is a change in the group We recommend adding a statement electing both passive activity grouping and hobby loss grouping whenever there are multiple entities for owning and operating the aircraft 55 Topics 1. Ownership structures 2. What is (and what isn t) business use? 3. Reporting business and non-business use of the aircraft on your tax return 4. Hobby loss trap 5. Renting and leasing issues 6. Depreciation 7. Deducting aircraft expenses by a W-2 employee 8. State tax issues 56 Depreciation Deduction Capitalize and depreciate: Aircraft Upgrades and overhauls Capital improvements Percentage of business use determines the amount of the depreciation deduction Apply business use percent to total available depreciation to determine amount of annual write off Depreciation can represent a substantial tax deduction 57 19

20 Depreciation Deductions Deduction rate is based on percentage of business use >50% business use - you can use accelerated depreciation <50%, must use straight-line Accelerated depreciation just means faster, not more Deprecation life depends upon predominant use 5-year life for Part 91 aircraft (7 years if <50% business use) 7-year life for Part 135 aircraft (12 years if <50% business use) Depreciation recovery period and method can change each year depending upon use 58 Bonus Depreciation purchases: Taxpayer has option to claim or not Applies to new property only Must qualify for accelerated depreciation (>50% business use) Applies to 50% of the cost of the property Depreciate non-bonus portion using normal depreciation methods Owner may take delivery of a new aircraft in 2014 providing the purchase was under contract before 01/01/14 Congress has not yet extended bonus provisions to 2014 purchases Taxpayer deducts business use % x bonus amount in 1 st year of business use Owner must continue to meet >50% business use test in subsequent years or recapture all bonus taken 59 Sec. 179 Depreciation Benefits Applies to new and used property In 2013: Expense capital improvements up to $500,000 Subject to $2,000,000 ceiling In 2014: Expense capital improvements up to $25,000 Subject to $200,000 ceiling Depreciate remainder of cost under normal methods NOTE: Section 179 cannot be used to create or increase a loss. Deduction only offsets taxable income 60 20

21 Topics 1. Ownership structures 2. What is (and what isn t) business use? 3. Reporting business and non-business use of the aircraft on your tax return 4. Hobby loss trap 5. Renting and leasing issues 6. Depreciation 7. Deducting aircraft expenses by a W-2 employee 8. State tax issues 61 Use of Aircraft by W-2 Employee IRS expects a business aircraft to be an asset of an operating company, not owned by an employee Aircraft owned and used by employees are challenging to deduct 62 Reporting Unreimbursed Aircraft Business Expenses for a W-2 Employee Deduct total expenses for the flight(s) from the amount of reimbursement to get net unreimbursed expenses Add unreimbursed business expenses to Form 2106 Form 2106 carries forward to Schedule A - Itemized Expenses Note: Such expenses are subject to a 2% AGI limitation Expenses need to exceed 2% of adjusted gross income in order to be included in your itemized deductions. If all of your itemized deductions do not exceed the standard deduction, you will not be able to deduct these expenses 63 21

22 Training Costs for Owner-Pilot Primary training costs for either owner-pilot or professional pilot are not deductible Additional training = facts and circumstances Maybe as a personal tax deduction (as opposed to a business deduction) Lifetime Learning Credit may be applicable: Be careful: Are you acquiring or improving job skills? If you are an airline pilot, possibly If you are a salesman, probably not 64 Topics 1. Ownership structures 2. What is (and what isn t) business use? 3. Reporting business and non-business use of the aircraft on your tax return 4. Hobby loss trap 5. Renting and leasing issues 6. Depreciation 7. Deducting aircraft expenses by a W-2 employee 8. State tax issues 65 State Sales Taxes Enforcement is increasing States need revenue and aircraft are big $$ States have easy access to information Internet flight tracking software Access to FAA public-use registration data States collect FBO rent rolls and hangar-tenant lists in order to locate untaxed aircraft 66 22

23 State Sales Taxes 43 States levy aircraft sales and use taxes Sales Tax applies to aircraft located in a state at the time of purchase Use Tax applies to purchases made outside of the state but brought into a state assessing sales tax If no sales tax has been paid, state where aircraft is based has use-tax nexus 67 State Sales Taxes Typical sales tax exemptions Fly-away exemption Use by air carrier (generally means 135) Aircraft weight Commercial use Leasing deferral (not all states) Permits deferring sales taxes over the life of a lease Generally must be set up prior to closing All rules vary by state; plan in advance NBAA website: State Tax Reports Conklin & de Decker 68 Ad Valorem Taxes 25 States levy ad valorem taxes on aircraft Ad valorem taxes are administrated by local municipality tax appraisers Tax is calculated on millage basis of cost or value Rates vary by county and airport Typical exemptions (where applicable): Commercial use % of use in the state vs. use outside the state (landings) Owners can sometimes provide proof that aircraft was not in state on valuation date 69 23

24 Parting Thoughts If you have a business and you own an aircraft, use your aircraft in your business Don t fear deducting your aircraft and aircraft related expenses; you are entitled to the deductions Don t fear reporting non-business use; the IRS will question if non-business use is limited Keep contemporaneous records and follow the reporting rules 70 Does Reporting Aircraft Cause Audits? Aircraft don t cause audits per se When auditors find aircraft they tend to examine carefully Poorly-planned ownership structure can increase IRS audit exposure Best practices: Place aircraft in a profitable company that can absorb the costs and depreciation Avoid single-purpose companies that only owns and reports the aircraft Document all business use 71 Thank You Very Much! Jed Wolcott, MBA Sue Folkringa, MBA Certified Public Accountants Wolcott & Associates, P.A NW 15 th Avenue, Suite 203 Fort Lauderdale, Florida

25 Flight Tax Systems, LLC Software for Aircraft Owners and Operators 73 Flight Tax Systems Software for Aircraft Owners & Operators Entertainment Cost Disallowance Reporting Features Jed R. Wolcott, MBA Certified Public Accountant 74 Flight Tax Systems GENERAL FEATURES Prepares SIFL and cost disallowance reports that are ready to use to prepare the aircraft company or individual tax returns Internet-based; access anywhere there is web-access Multiple owners/one aircraft and multiple aircraft/one owner Fleet can include owned, fractional, and jet card aircraft. Federal Excise Tax reporting SEC incremental cost reporting State tax reporting Cost center reporting Fully annotated with links to the IRS tax code and regulations No date restrictions; input last year s flights as well as this year s flights 75 25

26 Flight Tax Systems SIFL IMPUTED INCOME REPORTING Point-to-point reporting Control and non-control employees Tracks guests by the employee that issues invitation Recognizes 50% seating capacity rules Follows international SIFL rules for flights lasting in excess of 7 days Recognizes children under age 2 Recognizes Bona Fide Security Plans Spousal travel reporting Fiscal and calendar year reporting 76 Flight Tax Systems ENTERTAINMENT COST DISALLOWANCE FEATURES Calculates the entertainment cost disallowance percentage by Occupied Seat Miles (OSM), Occupied Seat Hours (OSH), Flight-By-Flight Miles (FBM), and Flight-By-Flight Hours (FBH) Recognizes specified individuals & their guests Reports deadhead flights as required by the final regulations Aggregates fleet aircraft in any combination Reports Open Jaw flights No date restrictions; input last year s flights as well as this year s flights 77 Flight Tax Systems STATE TAX MODULES Reports for calculating sales and use taxes Reports for limiting ad valorem taxes States included in Enterprise Version: Florida California Texas Louisiana Georgia Mississippi 78 26

27 Flight Tax Systems 79 Flight Tax Systems 80 Flight Tax Systems 81 27

28 Flight Tax Systems SIFL Report SIFL Year to Date Summary Footnotes explain SIFL reporting rules 82 Flight Tax Systems Entertainment Cost Disallowance Report Calculates entertainment cost disallowance under all four methods. Permits taxpayer to select the method that has the best results. 83 Flight Tax Systems Cost Center Allocation Report 84 28

29 Flight Tax Systems COST, BILLING AND SUPPORT Annual subscription is $3,995 (Enterprise version) Provides 12 months of program access Unlimited use; no date or aircraft restriction Custom programming and reports available Aviation CPAs from our parent company provide 2 hours of free support. We take you through setup and flight recording. Additional support available Call to sign up! 85 Thank You Very Much! Jed R. Wolcott, MBA Certified Public Accountant Flight Tax Systems, LLC 5525 NW 15 th Avenue, Suite 203 Fort Lauderdale, Florida jedw@aviation-cpa.com 86 29