““When I made the film The Invention of Lying, they gave me a private jet for getting back and forth between New York and London. I thought, ‘I will never use it’ but I ended up using it every weekend. You turn up, right, and the airport is completely empty. I mean, there’s just someone at the desk and then the pilot, who says, ‘Are you ready to go?’ and you say, ‘Don’t you want to see my passport?’ and he goes, ‘Oh yeah, I suppose I’d better.’” ”
Chartering your own aircraft
You wouldn't think of buying a house and then renting it to yourself. Why would you ever want to charter your own aircraft?
One answer is that while you certainly won't make money doing this, you may be able to save on state sales and use taxes. Most states charge a tax of as much as 10 percent of an aircraft's purchase price or lease payment. However, most states also recognize exemptions to this tax, and one of these can be using the aircraft primarily in "commercial" aviation. What this means varies from state to state, but in some jurisdictions chartering your own aircraft can count as a "commercial" operation, though as semi-bankrupt states cast about for additional tax revenue, they are increasingly requiring that the charter be from third parties. In some cases, charter operations can also help with other state taxes, such as property tax.
Another reason you might want to charter your own aircraft is to avoid the disallowance of deductions for federal income tax purposes in the case of "entertainment" flights. Several years ago, Congress changed the tax laws regarding flights for "entertainment, recreation or amusement" (as opposed to a business purpose), limiting deductions for such flights to the amount paid or income recognized by passengers. Under the new rules, for example, if a company provides a free flight to a vacation destination for its CEO, it can deduct expenses associated with that flight only to the extent that the CEO pays for the flight or recognizes income for a taxable "perk."
Unfortunately, what the CEO could pay for the flight via a time-sharing agreement under Federal Aviation Regulations Part 91 (or recognize as income with respect to the flight at IRS Standard Industry Fare Level rates) is far less than the allocable flight expenses that would otherwise be deductible. FAA rules limit the amount the CEO can pay for flights under a time-sharing agreement to two times fuel expense plus certain related amounts, but expenses subject to disallowance include an allocable portion of fixed costs and tax depreciation. The additional tax burden to the company on account of the vacation flight can therefore be considerable. For example, if the business acquires an aircraft in December and its only flight that year is for entertainment purposes, a deduction for all expenses of owning and operating the aircraft–including depreciation–would be disallowed.
However, payment of adequate and full consideration in a bona fide transaction can constitute an exception to entertainment disallowance rules under Section 274(e)(8) of the Internal Revenue Code. Thus, if the company's business is running an amusement park and the CEO takes his family to it, the company shouldn't forfeit tax deductions associated with the CEO's visit as long as he and his family pay the park's standard entrance fees, go on rides and eat hot dogs just like everybody else. Similarly, so the theory goes, if the company charters its jet to third parties to defray a portion of fixed costs, and the CEO charters the jet and pays the same arm's-length charter rate under the same arm's-length terms as other charter customers, the company's deductions shouldn't be disallowed.
As the National Business Aviation Association's Personal Use Handbook notes, however, "the IRS is likely to scrutinize such transactions carefully." Taxpayers intending to avoid or minimize entertainment disallowance through charter should therefore make sure that the aircraft is genuinely available for third-party charter and that any charter flights that might be considered "entertainment, recreation or amusement" are conducted on an arm's-length basis, advised Dow Lohnes tax attorney John Hoover, who played a major part in drafting the NBAA handbook. You and your affiliates should pay the same charter rate paid by everyone else.
A final note. Increasingly, aircraft owners charter their own aircraft to avoid the liabilities of operational control. By contrast with Part 91 flights, the charter certificate holder has operational control of charter flights and, from a regulatory standpoint, is responsible in the case of an incident or accident. Some aircraft owners say they sleep better at night as a result. But those peaceful slumbers come at a cost. Employing FAA commercial rules gives you less flexibility and means the charter operator will want compensation for assuming operational responsibility. Also, the IRS will impose the 7.5 percent transportation excise tax on amounts paid for such flights. So make sure you think carefully and consult appropriate experts before chartering your own aircraft–for whatever reason.