Tax Benefits to Fractional Aircraft Ownership

Imagine John, who owns a 1/8th share of a Cessna Citation CJ3+ through a fractional program, costing him $1.5 million (out of the total $12 million aircraft value). He uses the plane for business 75% of the time and for personal use 25%.

Here’s how he can potentially reduce his taxes:

Significant Upfront Deduction (Bonus Depreciation): In the year he buys his share, John can immediately deduct 80% of its cost, which is $1.2 million ($1.5 million * 80%).
Ongoing Depreciation: The remaining cost of his share ($300,000) can be deducted over the next seven years, amounting to about $42,857 annually.
Business Operating Costs: John can deduct 75% of all expenses related to operating the aircraft, such as fuel, maintenance, insurance, and hangar fees, since 75% of his usage is for business.
Financing Interest: If he took out a loan to buy his share, the interest paid on that loan is deductible.
State and Local Taxes: John can also deduct 75% of the state and local taxes he pays on his fractional share, like sales or property taxes.
Pilot Training: Any pilot training expenses required for his business use of the aircraft are deductible.
Business Travel Expenses: When using the aircraft for business, 75% of his related travel expenses, such as meals and lodging, can be deducted.
Entertainment Expenses: He can deduct 50% of entertainment costs incurred while using the aircraft for business purposes.

Important Note: The exact deductions John can claim will depend on his specific situation and actual expenses. It’s always best to consult with a tax professional specializing in aviation tax law for personalized advice, as tax laws can change.

This example demonstrates how various tax deductions can make fractional aircraft ownership more financially appealing by lowering an owner’s tax obligations.

Tax Benefits to Fractional Aircraft Ownership

If you own a fraction of an aircraft, several official resources from the IRS and FAA can help you understand the tax rules and regulations.

From the IRS (Internal Revenue Service):

Publication 946: This offers broad guidance on deducting business aircraft expenses, including details on depreciation and record-keeping, which are relevant to fractional ownership.
Publication 510: This publication covers excise taxes on aviation fuel and specifically addresses the fuel surtax that applies to fractional ownership programs.
Internal Revenue Bulletin (IRB) 2023-23 (Revenue Ruling 2023-23): This document clarifies the IRS’s definition of a “fractional ownership program aircraft” as it relates to the fuel surtax.
Notice 2023-31: This notice provides instructions on how fractional aircraft owners should handle the allocation of personal use of their aircraft for tax purposes.
Memorandum 2023-21: This memo examines how the fuel surtax applies to various scenarios within fractional ownership programs.

From the FAA (Federal Aviation Administration):

Subpart K of Part 91 of the Federal Aviation Regulations: This regulation outlines the specific requirements and rules that govern fractional ownership programs for aircraft.
FAA Order 8900.1: This order provides instructions for FAA inspectors on how to oversee and ensure compliance of fractional ownership programs.

These documents are essential for understanding and complying with the tax and regulatory aspects of fractional aircraft ownership. Keep in mind that tax laws and regulations can change, so it’s always advisable to consult with a tax professional who specializes in aviation tax law for the most current and personalised guidance.

Example of Fractional Aircraft Tax Deductions

Let’s look at a hypothetical case to see how owning a share of an aircraft can lead to tax savings.

Imagine John buys a 1/8th share of a Cessna Citation CJ3+ for $1.5 million (the whole plane is valued at $12 million). He uses the aircraft for his business 75% of the time and for personal reasons 25%.

Here are some of the potential tax write-offs available to him:

Immediate Large Deduction (Bonus Depreciation): In the year he acquires his share, John can deduct a significant portion – 80% – of its cost. This amounts to a $1.2 million deduction right away ($1.5 million * 80%).
Ongoing Depreciation: After the initial bonus depreciation, the remaining $300,000 of his share’s cost can be spread out and deducted over the next seven years. This works out to approximately $42,857 in deductions annually.
Operating Cost Deductions: Since 75% of his usage is for business, John can deduct 75% of the aircraft’s operational expenses, including fuel, maintenance, insurance, and hangar fees.
Interest on Loan: If John financed his fractional share, the interest payments on that loan are tax-deductible.
State and Local Tax Write-offs: He can also deduct 75% of the state and local taxes, like sales and property taxes, paid on his fractional share.
Flight Training Costs: If John needs pilot training for his business use of the aircraft, those costs are deductible.
Business Travel Expenses: When flying for business, 75% of his related travel expenses (like meals and lodging) can be deducted.
Business Entertainment Expenses: He can deduct 50% of entertainment expenses incurred while using the aircraft for business purposes.

Important Considerations: The actual amount John can deduct will depend on his specific expenses and how much he truly uses the aircraft for business. It’s always a good idea to talk to a tax advisor who specializes in aviation tax law for personalized and up-to-date guidance.

This example simply illustrates how fractional aircraft ownership can become a more financially appealing option by allowing owners to significantly reduce their tax burden through various deductions.