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At NBAA Taxes Seminar, Financial and Legal Advisors Tout Working Together
May 5, 2014
“I’ll tell you about our life in business aviation,” said Kevin Austin, founder of Aero Law Group, “It’s a giant whack-a-mole game. Once you get your head around FAA regulations, someone brings up federal income tax. You knock that mole down, another one pops up: state sales and use taxes. You solve that problem, you find out the IRS has a different set of rules regarding federal excise tax (FET), and they’re not congruent.”
Austin was speaking to more than 100 colleagues, including aviation lawyers, certified public accountants (CPAs), financial advisors and aircraft operators at NBAA’s 2014 Business Aviation Taxes Seminar in San Francisco, CA on May 2.
The full-day program – with nine panels and more than a dozen expert speakers – was devoted to discussing strategies for aircraft operators to minimize their state and federal tax burden, all while complying with overlapping and often contradictory FAA, IRS and Securities and Exchange Commission (SEC) regulations.
“The whack-a-mole illustration demonstrates the tension between a variety of disciplines when planning an ownership structure for an aircraft,” said Keith Swirsky, president of GKG Law. “It isn’t easy, and you can’t separately engage one advisor to do the sales and use tax planning, another to give you federal tax advice and somebody else to do the FAA planning; it has to be integrated.”
The only way to avoid a “gotcha moment” during an audit, said the speakers, is to get all your financial and legal advisors to work together, as early as possible in the process of acquiring an aircraft or changing the ownership structure.
The seminar agenda was structured approximately in the order Swirsky recommended clients do their tax and regulatory planning: Start with FAA regulations and state sales and use tax, because Part 91 or 135 compliance is paramount, and state tax issues tend be form-driven – they depend on the aircraft ownership structure – while “federal income tax issues are more about substance over form.”
The morning sessions examined evolving state tax issues, with a focus on California and Washington. As CenterPoint Aviation attorney Jordan Miller explained, “Coming out of the recession, our typical aircraft planning structures are being more heavily scrutinized by state tax authorities.”
Miller, and California-based CPA George Rice, covered best practices for dry leases to prepare for a state tax audit; how to plan an aircraft purchase to secure an exemption from California state use tax and the emerging trend of states passing “unfair tax avoidance” laws that could target certain aircraft ownership structures.
Then afternoon panels covered federal audit traps like hobby loss and the “leasing company trap,” FET as applied to aircraft management companies, SEC reporting and non-business use of aircraft. Read more about avoiding the leasing company trap.
Most presenters said the key to avoiding audit traps is a practical approach: stopping to consider whether a flight classification would pass the audit “sniff test” or “straight-faced test.”
“Imagine sitting across the table from an IRS agent,” said Jed Wolcott, CPA and president of Wolcott & Associates, “can you make your argument with a straight face?”
Throughout the seminar, the speakers urged having a business plan that explains how the aircraft contributes to the operating company’s profitability and growth. It’s the business plan that should guide how the aircraft is operated – and how one documents its use as a valid business expense.
As Cooley Senior Counsel John Hoover put it, “You’ve got to figure out what your story is before you get the evidence together to support it.”
The next Business Aviation Taxes Seminar will be held in Dallas, TX on May 8, 2015. Learn more about the 2015 Business Aviation Taxes Seminar.