Up, Up and Away: All You Need to Know about Private Aviation – Post 4
November 12, 2017
By Jean Jiang
EisnerAmper PWA group partner Peter Michaelson moderated this panel discussion, which featured Kenny Dichter, founder and CEO of Wheels Up and John Hoover, special counsel at Cooley LLP. The panel discussed exploring private aviation as an alternative to commercial travel, the latest trends and available options, tax considerations and other issues.
Owning, Leasing or Using Membership-Based Private Aviation
Kenny provided his thoughts on the main influences and processes in undertaking the funding of Wheels Up. Kenny stated that he started the business with the membership-based flights which significantly reduce the upfront cost to fly privately, provide flexibility and first class services and safety. Looking back the history of the U.S. private aviation market, owning a private plane or leasing through a shared interest raised challenges due to the complexity of regulations as well as dramatic depreciation in the residual value of the planes. As the younger generations joins the ranks of those considering private aircraft travel, membership-based private aviation is a growing trend.
John discussed FAA restrictions to owning or operating a private aircraft, as well as the chartered service rules and certifications. It’s a very challenging environment, and pitfalls abound. The complexity of the structures of owning or leasing aircraft, tax implications and FAA restrictions further complicate the business. Changes in Airline Industry Trends and Travelers Expectations
Kenny outlined the airline industry changes and trends from the turn of the century though current day. First, as more travelers have experienced painstaking processes in the airports and TSA security screenings, using private aircraft has grown as an alternative to travel for those who can afford it. Second, more people are valuing their time with their family and are inclined to achieve their goals in the fastest and easiest ways possible. Lastly, more people have become affluent enough to travel with family members and fly privately.
Tax Considerations on Operating a Private Aircraft
John discussed the sales and income tax issues which need to be addressed when operating a private aviation, and explained how sales tax would be one of the big issues. The structure of who owns, who operates, and who rides, for example, could trigger the sales tax at 7.5% of the FMV of chartered aircraft fees. The sales tax is also an issue when private aircraft is purchased, as it is on the location of the plane when the purchase happened. Some jurisdictions have exemptions on the sales tax, such as NY, but if the aircraft is actually used or based in other jurisdictions, the aircraft may be subject to the use tax. John also discussed in detail some exceptions on sales tax in different states under various ownership structures and conditions. The other tax issues of operating private aircrafts are related to the income tax rules. A substantial tax benefit for owning and operating aircrafts is a large upfront deduction from bonus depreciation. However, certain loss limitations such as hobby losses, passive activity losses rules, expense limitation associated with entertainment disallowance, and income recognition for employer-provided aircraft may apply.
Business Opportunities and Challenges in the Aviation Industry
Kenny discussed the business opportunities and challenges in the aviation industry, including:
- Shortage in pilots: Becoming an experienced pilot requires extensive training. Fewer people are currently going into the pilot business, and industry pilots are mainly sourced from military services.
- Infrastructure: There are not many new airports being built around the world, even though the traveling population is increasing. Airports are crowed and needed to be upgraded in technologies and facilities. And TSA security and safety rules have dramatically increased the time it takes for airports to process travelers and aircraft.
- Wealth Trending: There are many more young people with the financial capability and willingness to own a private plane.
- Comparison: The complexities of owning or operating private aircrafts and the alternative of a membership-based private aviation has become a valid choice.
Knowledge is Power
Which led us to the final part of our conversation. Peter, John and Kenny discussed the structures and arrangements of owning or operating private aircraft. John discussed the traditional structure of putting the aircraft in an entity and using it only for that business, which will be easiest and simplest way; all other structure can bring exposure to complications when we consider business and nonbusiness limitations, executive use of plane, sales and use tax issues and loss limitations. Kenny stated that people sometimes make decisions on his or her ego, but that a sound method for owning aircraft vs. using membership-based private aviation should be based on the usage of the plane. If one uses the private plane more than 300 to 400 hours per year, it’s better to own the plane for the flexibility and exclusive usage. If one flies less than 150 hours per year, then taking membership-based private aircraft will make sense.
Private Wealth & Family Office Summit Series
The Next Generation of Philanthropy - Post 1
Family Business Succession Planning - Post 2
Difficult Discussions with Family Members and Conflict Resolution - Post 3
Up, Up and Away: All You Need to Know about Private Aviation - Post 4