Is your airplane a hobby?
By Jeff Wieand - February 1, 2009
What do a business jet and a stamp collection have in common? According to the Internal Revenue Service, both may be hobbies. If the IRS considers your aircraft a hobby, you won’t be able to write off all the related expenses for tax purposes.
To the extent that you employ an aircraft in a genuine business, you can ordinarily deduct the costs of owning and operating it. In good times, these expenses will offset taxable income from the business, but in bad times, expenses (including those for the aircraft) may exceed business income. In that case, the expenses may offset taxable income from your other activities or be carried forward to offset income in future years.
The deduction of expenses of owning and operating a business jet frequently attracts IRS scrutiny because of the large sums involved. If the IRS takes a hard look at your business and decides that it’s really a hobby, you won’t be able to use expenses of the hobby to offset income from other activities, and you will be able to deduct expenses only up to the amount of income the hobby generates. Instead of being carried forward, losses in excess of this amount are gone forever.
How do you know whether your aircraft is involved in a hobby? According to the IRS, a business differs from a hobby because it’s conducted for profit. Fortunately, you don’t actually have to make a profit; the IRS acknowledges that people can make poor business decisions and that businesses often fail despite the best intentions. But the intentions have to be there; profit must be the goal.
A good candidate for an aircraft hobby masquerading as a for-profit enterprise is a charter “business.” Except in unusual circumstances, putting your jet out for charter will rarely do more than help cover some of your fixed ownership expenses, such as capital cost, hangar rent and crew salaries. So if you claim you own a business jet so you can make money chartering it out when the aircraft’s real purpose is personal use or enjoyment, you may have a tough time convincing the IRS that you’re really engaged in a for-profit business.
Interestingly, not everyone has figured out that it’s virtually impossible to make money by buying and chartering a business jet. The leading case in this area, Rabinowitz v. Commissioner (2005), is actually a victory for the taxpayer. Rabinowitz and his spouse set up a company called Beverly Hills Jet (BHJ) to own and operate a Falcon 200. BHJ chartered the aircraft to third parties, including California Fashion Industries (CFI), a company also owned by the Rabinowtizes. Not surprisingly, the business jet charter company consistently lost money, and the IRS disallowed BHJ’s substantial tax deductions on the grounds that the taxpayers did not engage in the jet charter activity for profit. Presumably, the IRS figured they enjoyed having the jet available for their own travel, including through CFI.
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