NBAA's Business Aviation Convention & Exhibition (NBAA-BACE)

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Examining the Regulatory Complexities and Risk Implications of Business Aviation Tax Policy

Oct. 9, 2017

Strategies to best utilize current taxation policies without running afoul of IRS or FAA regulations were spotlighted throughout the 2017 NBAA Tax, Regulatory and Risk Management Conference, held prior to the opening of NBAA-BACE in Las Vegas. A packed opening session kicked off the two-day event, with approximately 250 operators, aviation attorneys and CPAs in attendance.

"This is one of the larger groups we've brought together, which reflects the overall strengthening marketplace for aircraft," said NBAA Tax Committee Chairman Jeff Towers with TVPX. "That's certainly a credit to the professionals in this room."

The 2017 conference began with remarks by Scott O'Brien, NBAA senior director of finance and tax policy and staff liaison to the NBAA Tax Committee, who presented an overview of the industry's ongoing fight over ATC privatization.

O'Brien also discussed progress on tax reform measures in Congress that could lower individual and business tax rates, perhaps at the expense of broadening tax bases, and a new "toll charge" against previously untaxed accumulated foreign earnings. Those measures are currently being debated in the House Ways & Means and the Senate Finance Committees.

Other topics discussed included strategies to best utilize tax depreciation schedules and review of state tax planning strategies. Separate breakout sessions addressed new aircraft financing options, and tax impacts from mandatory equipage of technologies such as FANS and ADS-B.

FAA Regulations Drive Aviation Tax Policies

One of the most basic questions for business aviation operators – are you a true Part 91 non-commercial operation, or Part 135 flying for compensation or hire – also poses the greatest challenge not only from a taxation perspective, but also with the FAA.

"Most of the time clients are focused on the tax issues, but I usually start by focusing on the FAA issues first," said attorney David Norton of Shackelford, Bowen, McKinley & Norton, LLP. "That's the body of rules most people don't pay attention to, and there's a lot of misunderstanding out there. It's going to have a huge impact on the best strategy for you to operate the airplane."

Time sharing, interchange, joint ownership, co-ownership and personal use reimbursement arrangements are all possible under Part 91.501 covering operating rules, including cost-sharing benefits, for large, turbojet-powered airplanes of U.S. registry not involving common carriage. NBAA's Small Aircraft Exemption provides these same benefits for aircraft smaller than 12,500 pounds.

Legality of such operations often comes down to the matter of the entity holding operational control. "We usually think of the operator as the pilot manipulating the aircraft controls," said presenter Joanne Barbera of Barbera & Watkins, LLC, "but really what we're talking about [in this context] is the party exercising authority over initiating, conducting or terminating the flight."

There's also the matter of whether the aircraft was leased, and proper disclosure of the entity holding operational control under the requirements of FAR 91.23, or the "truth in leasing" clause. Under a wet lease in which the lessor provides flight crew, the lessor assumes operational control, but the lessee makes those decisions when operating a dry lease where the lessee provides the crew.

"The FAA is concerned about whether the aircraft operator is carrying persons or cargo for compensation or hire," Norton added. "If the answer to that question is yes, you need to operate under commercial rules. It's not what you think is commercial, but what the FAA says it is."

Change Remains the Only Constant

A separate session examined four scenarios – a company merger, acquisition, spin-off and foreign takeover – reflecting the impacts from today's shifting and dynamic business environment on flight departments. Even the most benign examples of combining two companies present complexities for integrating flight operations and properly ascertaining the tax, regulatory and risk management implications.

"If you asked flight departments in our four examples here if they knew a corporate change was coming, all would have said they had no idea," said presenter David Hernandez of Vedder Price. "All of these changes occurred at the C-suite level, and one of the questions I always ask is whether they've told the flight department yet. The answer is always no."

"Very rarely do flight departments have the opportunity to have the luxury of having a seat at the table," added Jeff Agur with the VanAllen Group, "but that's really what we're asking for in order to ensure the regulatory, operational and organizational impacts that come into play have been properly considered."

Agur pointed to one case study in which an acquired supplier spent millions for early termination of an existing aircraft lease as part of a company takeover, only to have the buyout process subsequently halted under review by the Department of Justice. "That may not have been the best move [to buy out that lease]," he noted.

The conference continued Monday addressing tax implications of personal-use flights and foreign-owned aircraft, non-traditional ownership structures, and presentation of a mock IRS audit.

Learn more about the NBAA Tax, Regulatory & Risk Management Conference.

Review NBAA's tax resources.

Learn about NBAA's Small Aircraft Exemption.