September 27, 2024 • 25 mins
Want to save tens of thousands $$$ buying a jet in Q4? This is the episode you need to hear!
Join Tom Lelyo and aviation tax expert KJ McCarter, CPA as they dive into the intricacies of buying a private jet and maximizing tax benefits in 2024! In this episode, they explore critical topics like bonus depreciation, the importance of timing your purchase, and the nuances of aviation taxes. Don't miss out on essential tips for tax savings and the deadlines you must meet to optimize your investment!
Episode Highlights:
- Bonus Depreciation 📉: Learn about the 60% bonus depreciation for 2024 and its tax implications.
- Timing Matters ⏰: Discover why placing the jet in service before year-end is crucial for maximizing deductions.
- Tax Responsibilities 🧾: Get clarity on the buyer's responsibilities for sales and use taxes after the purchase.
- Flyaway States 🌍: Understand what flyaway states are and how they can help you avoid additional sales tax.
- Consulting Experts 📞: Emphasize the importance of tax planning and seeking expert advice before closing on a jet purchase.
Want to find out more? Reach out to KJ McCarter, CPA:
https://aviationtaxconsultants.com/
info@aviationtaxconsultants.com
🤝 Join our FREE Private Online Community for aspiring Jet Brokers: https://circle.jetlifeaero.com
Being a Private Jet Broker is a life changing opportunity for those seeking a career in an industry that has low competition and extremely high commissions.
Let's book a call so you can discover how to get your FIRST SALE and start a new career in Aviation - https://www.theultimatejetguide.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
All right, kj.
So it's past Thanksgiving, it'sDecember 1st, and I just
announced to my family atThanksgiving dinner that, hey,
I'm going to be buying my veryfirst private jet.
The election's over, mycandidate won, I can't wait.
So here we go.
It's December 1st.
Is it too late for me to buy aprivate jet?
Well, tom, it might be.
(00:20):
Hello everybody and welcome.
My name is Tom Lelio.
I'm your Ultimate Jet Guide andon this channel we pull back
the curtain on private aviationto help you, whether you're a
buyer or an aspiring broker, buyand sell private jets with no
experience necessary.
Today we're tackling theexciting world of aviation taxes
(00:44):
.
Let's go, and so I am bringingon an expert from Aviation Tax
Consultants.
This is KJ McCarter.
Kj, welcome to the podcast.
Speaker 2 (00:55):
Thanks, tom, appreciate having me on again.
Speaker 1 (00:57):
Yeah for sure.
Well, you know, frankly, whathappened was we were just kind
of hanging out and scrolling andI came across an article that
someone at your shop was sharingabout the 60% bonus
depreciation for 2025 aircraftdeliveries, and I had some
(01:18):
questions on it.
I was like, okay, so if I buyan aircraft in 2025, do I get
60%?
And then it was talking tothings like words like place in
service and year end and allthis fun stuff that I'm just
like I don't know what's goingon.
So I wanted to get a chance tospeak with you and just kind of
pick your brain on this wholething, and thank you very much
(01:40):
to you and Aviation TaxesHolston for putting that article
out there.
Speaker 2 (01:43):
Yeah, kyle Kamen from our office prepared that
article and did a great job withit.
It does a good job touchingbase on basically the difference
between placing a plane inservice before the fourth
quarter of the year versuswithin the fourth quarter of
2024.
Because there's a little bitmore depreciation available
potentially if we place the planin service prior to the fourth
(02:05):
quarter beginning versus if wewait until after September 30th.
However, a really importantpiece to discuss here too is
just the fact that if we want totake any deductions in 2024, we
need to place a plan in servicebefore year end.
So it's very very important Evenif you don't close before
September 30th, it's importantthat you close before December
(02:30):
31st and also place the plane inservice, which we can discuss
what that means prior to yearend if you want to depreciate
the plane in 2024.
Because if you close in 2025and place the plane in service
for tax purposes in 2025,depreciation deductions will
begin in 2025.
Speaker 1 (02:46):
Right right, All right.
So let's pull back the curtainhere and start from the very
beginning.
First and foremost, this ideaof buying a jet for tax purposes
basically boils down to if Ibuy a private jet, I can write
off all or part of the purchaseagainst my taxable income, and
(03:07):
so for the last few years itstarted off, I could write the
whole thing off at 100%, andthen, I believe two years ago,
it went down to 80%.
This year we're at 60%.
So if I buy a million dollarjet, I can write off 60% in that
year that I buy it, and thenthe rest of that 40% I can write
off over a longer period oftime.
(03:28):
Do I have it right so far?
Speaker 2 (03:30):
That is a very important piece to remember is
that we are at 60% bonusdepreciation in 2024.
Generally now it's scheduled tophase down to 40% in 2025 and
down 20% each year thereafter,but you're not losing that
amount.
So when we take 60% bonusdepreciation, we're not losing
(03:50):
the other 40%, we're just takingit over a five-year maker's
schedule.
If we take 40% bonusdepreciation in 2025, the other
60% we're taking over afive-year maker's schedule.
So we're still gettingeverything.
It's just over a slightlylonger period of time.
So bonus depreciation in a waythe name is kind of a misnomer.
We're not getting extradepreciation, we're just getting
(04:13):
it faster.
Speaker 1 (04:15):
Gotcha, and so, no matter what, is it always going
to be a five-year depreciationafter you take the bonus part?
Speaker 2 (04:23):
a part 91 plane five-year makers is the
accelerated schedule that we usefor the remainder of the basis
gotcha okay, cool, um.
Speaker 1 (04:31):
But you know, earlier this year, you know I heard
some rumblings around theaviation world that we could
potentially be coming back to.
Uh, there was litigate, therewas laws trying to get past I
think, past the house, if Iremember correctly to try to to
bring back a higher bonusdepreciation.
Do you have any updates on that?
Speaker 2 (04:56):
So that passed the House but unfortunately was
voted against by the Senate.
Down 20% each year unless thereis a new legislation after
November, which some parties inour industry are hopeful that
that will get done afterNovember, but we'll see so as of
now.
The current schedule is we'llhave 40% bonus depreciation in
(05:19):
2025, 60% for 2024.
And then, of course, Section179 is still an option as well.
Speaker 1 (05:27):
Okay, so I want to buy a plane to take a write-off
Now.
Part of what the articlediscussed was the idea that if I
buy a plane before September30th and put it into service
before September 30th, there maybe advantages as opposed to
buying it after September 30thand put it into service before
September 30th.
There may be advantages asopposed to buying it after
September 30th.
(05:47):
So if someone's finding thisvideo just on a whim and it's no
longer 2024, talk to me.
Or maybe they're finding itright now and they're about to
buy a plane and we drop this onSeptember 29th.
Who knows what's the advantageof buying before September 30th
and what happens after September30th?
Speaker 2 (06:07):
Yeah, the the bottom line is if we place the plane in
service before September 30th,we get to use a slightly
different maker schedule basedon that placement service date.
So we can actually write off.
If we're taking bonus, 60%bonus, depreciation as well,
we'd write off about 68% of thebasis in 2024, versus if we
place the plan in service afterSeptember 30th, then we'd write
(06:29):
off about 62%, depreciate about62% of the basis in 2024.
So we lose about 6% if we placethe plan in service after that
date.
So it's important if we want tomaximize the amount of
depreciation that we take in2024, placing in service before
September 30th would be helpful.
Speaker 1 (06:49):
I mean 6%.
I mean that's only about$60,000 on a million dollar
purchase.
So I mean that's chump changefor some people.
Speaker 2 (07:02):
Yeah, the much more important date is December 31st,
gosh let's roll into that.
Yep, if we place the plan inservice in 2024, even if it's in
December, we still get to take60% bonus depreciate.
We get that 62% totaldepreciation in 2024, with the
(07:22):
remaining 38% basis to bedepreciated over a five-year
maker's schedule.
Versus if we wait until January2025, then we don't get to
depreciate the plane until 2025.
So we don't get the deductionin 2025.
Five, we'll only have 40% bonusdepreciation as of now.
(07:42):
So not only do we have aone-year delay, and when we get
to actually take thedepreciation on the plane, we
also have a lower bonusdepreciation rate.
So it's important fortax-motivated buyers that have
lots of taxable income fromtheir business in 2024 to get
the process started with theaircraft search as soon as
(08:04):
possible in order to be able toclose and place a plane in
service before year end of 2024.
Speaker 1 (08:10):
So okay, so I've got a.
I've got a $600,000 tax bill.
I buy a million dollar jet.
If I buy it in 2024, I canwrite off all that tax bill 60%
of a million.
Speaker 2 (08:24):
Of course, call me to confirm the facts related to
your business, Sure sure, sure,I mean an oversimplification and
the math on it.
Speaker 1 (08:33):
that's close to what the math would roughly be.
Speaker 2 (08:36):
Yeah, the napkin math would be if you have $600,000
of taxable income in yourbusiness and you go out and buy
this million dollar plane, thenwe can use the bonus
depreciation deduction from theplane to offset that $600,000 of
taxable income and the taxsavings would be whatever the
(08:56):
marginal tax rate is of thatincome multiplied by the
deduction.
So we get a substantial taxsavings in that scenario and
that's what most of our clientsare motivated to do.
The fourth quarter of the yearis our busiest time of year by
far because our clients are verymotivated to depreciate a plane
this tax year before year end.
Speaker 1 (09:17):
Now if next year I buy a million dollar jet, I have
a $600,000.
If next year I buy a milliondollar jet, I have a $600,000
taxable income, I'm only goingto be able to write off 40% of
the million, or $400,000 tooffset that 600.
And again we're not losing therest of it, but just for that
(09:40):
year, the max I can go againstit would be the 40% 40% plus the
first year of five-year makers.
Speaker 2 (09:42):
But yes, we'll have a smaller deduction in 2025
unless there's legislativechange.
So, as you mentioned, there'snothing being lost.
As long as this taxpayer hassubstantial incomes going into
the future, then they'll stillget to utilize that deduction in
future years, but we don't getas much immediate benefit in
(10:03):
2025.
Speaker 1 (10:05):
All right, well, that's great.
So I'm going to go ahead.
I'm going to set up my pre-buyand I'm scheduled to close on
December 31st, and I'm going totake my first flight on New
Year's Day to take my family outto treat themselves for a brand
new new me, new jet 2025.
Is there any problem with that?
(10:26):
Buying my jet on December 31st,but I don't fly it until the
next day?
Speaker 2 (10:31):
Optimally, we do need to close before year end of
2024.
There's no doubt about that.
And then, optimally, we wouldhave one or more business
flights in 2024 to firmly placethe plane in service for tax
purposes.
However, that's not an absoluterequirement to place the plane
in service.
The requirement is that theplane has to be in a state of
(10:53):
readiness and availability forits intended use.
That actually is quite gray.
There's a lot of nuance there.
Definitely call me or my firmto discuss and we can make sure
that you have a good plan toplace the plane in service prior
to year end.
But and we can make sure thatyou have a good plan to place
the plane in service prior toyear end.
But if we can, we'd like tohave one or more business
flights prior to year end, andit's important that that's a
business flight too.
If we have one entertainmentflight prior to year end and
(11:15):
that's the only use of the planein 2024,.
our business use percentage in2024 is zero, so we wouldn't be
able to take a deductionpercentage in 2024 is zero, so
we wouldn't be able to take adeduction.
Speaker 1 (11:29):
Now I think, yeah, that's really important.
I think you guys outlined thisright.
So what does it mean?
To qualify for the depreciation, we need a binding contract to
purchase by the 31st.
We needed a deposit of either10% or a hundred grand the
lesser of and we need to takedelivery and placing the
aircraft in service by December30th, and that's kind of what
(11:49):
we're talking about right now,and then the depreciation
deduction will be taken.
Okay, so this was a littleconfusing to me.
So, like, I guess I was gettingconfused because they started
throwing out 2020, like buy bythe 24th to qualify for
depreciation in 2025.
And then, like taxes alwaystalk about, like my 2025 taxes
are actually for the 2024 year.
(12:10):
Like, can you, just just so I'mclear?
I was.
I was a little confused on,like, the dates that this thing
is that your blog is talkingabout.
Can you clear that up for me?
Speaker 2 (12:19):
This is a.
This is a completely separateprovision that relates to
placing an order for a new plane.
This is going to deliver in2025.
In that type of scenario, youactually get a one-year delay in
the phase down of the bonusdepreciation rate.
So you could take 60% bonusdepreciation in 2025 for an
aircraft delivering in 2025 andbeing placed in service in 2025.
(12:42):
If you place the order withthese requirements, oh, aircraft
, okay, Okay, okay, okay Okay.
Speaker 1 (12:50):
Oh, this is for the deliveries.
Oh, is this another?
Am I on the wrong blog?
Speaker 2 (12:53):
This is a yeah, that's a, that's a.
Speaker 1 (12:57):
I was on the wrong blog the whole stinking time.
You should have said something,dude.
Okay, this is what we wereoriginally talking about.
Okay, okay, yes, 100% since2017.
Okay, gotcha, gotcha, gotcha,gotcha, okay, okay.
So the biggest thing I imagineit's similar to take deduction
(13:18):
you need a binding contract.
Speaker 2 (13:27):
You need to prove that you closed on the aircraft.
I assume basically yeah, ofcourse we do need to close on
the plane.
That needs to be done If we'rewanting to take 68% in 2024,
that needs to be September 30thor prior.
Uh, after September, september30th it'd be about 62%.
We need to close on the planeand place it in service so that
binding contract language anddeposit language more so applies
to getting that one-year delayin the phase down.
(13:50):
So used aircraft buyers not asrelevant.
Speaker 1 (13:54):
Gotcha, okay, gotcha, all right, well, great.
So I'm about to close, I'mabout to offset my taxes for the
end of the year, but theconversation that this always
comes back to for you and me iswhat are the taxes due at
closing?
Let's run through it again.
(14:15):
Here's my best pitch when I'mtalking to buyers and sellers,
listen, taxes I'm going to dostep by step.
Taxes are the responsibility ofthe seller, true or false?
Speaker 2 (14:28):
Taxes are generally the responsibility of the buyer.
Speaker 1 (14:31):
Okay, oh, the buyer.
Speaker 2 (14:33):
Come on the buyer.
It can be a bit more nuancedthan that in some cases, but
generally speaking, sales taxand use tax and personal
property tax is theresponsibility of the buyer
after they buy the plane.
Speaker 1 (14:46):
So I buy the plane, I have to pay the tax to Florida
and to whatever state Correct.
Speaker 2 (14:54):
The buyer would have that responsibility to the state
where closing occurs if theydon't meet an exemption and
their home state where they basethe plane, where they may have
a use tax liability.
Speaker 1 (15:06):
So that's okay.
So premise number one is taxesare the responsibility of the
buyer.
So if nothing happens, whoeveris owed taxes, they're going to
come after the buyer.
Speaker 2 (15:18):
Correct.
And the exception to that ruleis if we close in a state where
the seller has a sales taxaccount, they may have an
obligation to collect that salestax.
Speaker 1 (15:28):
Oh, that's where I got confused.
Unless presented with anexemption, Otherwise it's a
responsibility.
Okay, is Florida one of thosestates where the seller has the
responsibility to collect?
Speaker 2 (15:39):
If they have a Florida sales tax account, they
would have an obligation tocollect sales tax from the buyer
if closing occurs in Florida asa Florida registered dealer.
If closing is in a neutralstate, generally that liability
just rests with the buyer andthe responsibility rests with
the buyer.
Speaker 1 (15:55):
Okay, okay, so the responsibility rests with the
buyer.
I'm with you so far Now.
So usually it's, and that makessense, because usually it's the
buyer that's asking to closesomewhere else.
The seller's just like take mydebt, okay, that makes more
sense.
So the buyer's the one that'strying to get a tax friendly.
(16:15):
Now we have these things calledflyaway states.
What is that?
Speaker 2 (16:20):
A flyaway state is a state that has an exemption.
That essentially carves out ascenario where a buyer is buying
a plane but they're not goingto base, hangar, utilize,
register the plane in that state.
They're just picking up theplane and leaving.
So the state says, hey, youdon't owe a sales tax in that
scenario.
(16:40):
Lots of states have that typeof flyaway exemption, but there
are some that don't.
So it is a very important partof the tax planning process to
select a tax-friendly state forclosing.
Fortunately there's a lot ofthem.
So if pre-buy is occurring in astate that is not tax friendly
for closing, they don't have aflyaway exemption.
We will help the buyer identifya nearby tax friendly state to
(17:06):
reposition the plate you'reproposing.
Speaker 1 (17:08):
So if you have a seller up north, let's say
Massachusetts, you've got abuyer elsewhere that wants to
close in South Carolina, southcarolina, I don't know if I
guess let me preface this Idon't know if they want to close
in south carolina because it'sa tax friendly or b, a flyway
(17:29):
state, or b or c, both or d, not, not none of the other.
I don't know if they are theyrelated.
Is a flyway state necessarily atax friendly state or it's just
that you can get it out ofthere easily?
But it doesn't necessarily meanit's be, because I imagine
South Carolina has some kind ofspecial sauce.
Everybody wants to close there.
Speaker 2 (17:47):
A flyaway state is tax-friendly if the buyer can
meet that flyaway exemption.
But there are states that aretax-friendly without being a
flyaway state.
The reason that South Carolinais tax friendly for closing is
not because it has a flyawayexemption, but rather that its
sales tax is capped at $500.
So obviously a de minimisamount when it comes to an
(18:08):
aircraft transaction.
So lots of aircraftacquisitions close in South
Carolina for that reason.
Speaker 1 (18:16):
Okay, so I'm a buyer.
I'm a buyer, so it doesn'tmatter that the planes in.
Well, it matters that theplanes in Florida getting the
pre-buy because I can, I canleave Florida and close on it
without having to.
Well, oh no, the point of theflyway exemption is because I
can close and go away andFlorida is not going to chase me
(18:36):
.
That's the point of the flyway.
I'm going to close here andthey're not going to chase me,
but I might still be on the hookfor wherever I close, Like I
might go to.
Uh, where's a terrible place?
New York, I just just guessing.
I might fly, you know, to NewYork and get really smacked over
the head.
Or California and get smackedover the head with tax If I
close there.
Speaker 2 (18:57):
Correct the closing location is what matters.
Now, surprisingly, New York isactually friendly.
They don't have sales or usetax on aircraft.
Oh okay, California does have aflyaway exemption.
It's not the best flyawayexemption though Okay, don't
need to go too deep into theweeds on that one but both are
friendlier than you would think.
Places that are not friendly toclose, that don't have flyaway
(19:17):
exemptions.
That is an important piece toconsider, and what matters is
where we close, not necessarilywhere pre-buy is.
So pre-buy can take place inOhio, for example, which doesn't
have a flyaway exemption.
That's not an issue from a taxperspective, as long as we can
reposition the plane from Ohiopost pre-buy but pre-closing to
(19:40):
another state that does have anexemption that we can meet or
otherwise, we're able to beexempt from sales tax.
So, for example, pre-buys thathappen in Ohio, it's very common
for the plane to berepositioned to Indiana for
closing because Indiana has afriendly flyway exemption.
Speaker 1 (19:55):
Right Now.
I go to South Carolina, I go toIndiana.
I pay my sales tax on thetransaction, but now I need to
worry about, as the buyer, whereI'm going to be using the
aircraft.
Is that right?
Speaker 2 (20:09):
That's correct.
So we close on the plane in asales tax friendly state that we
help you identify, we meet aflyaway exemption or otherwise
close somewhere that has minimalsales tax or doesn't have sales
tax on aircraft or doesn't havesales tax at all.
But then the plane comes backto the home state where the
buyer is going to base thatplane and hangar it and utilize
(20:29):
it.
So let's say, for the sake ofthis example, it's Florida where
you're based on.
When the plane comes back toFlorida, even if we closed in
Indiana, which was sales taxfriendly, florida would like to
collect use tax on the planeunless we meet some sort of
exemption, and that use tax is6% plus a little bit of local.
So if it's a million dollarplane, a little over $60,000.
(20:52):
So that's obviously a veryimportant planning topic amongst
our client base.
See, a very important planningtopic amongst our client base
and generally in most states wedo have use tax planning options
to defer or be exempt from thatliability.
It varies widely from state tostate.
You absolutely, if you're anaircraft buyer, you should be
calling a firm like mine orsimilar to talk about what your
(21:15):
options are, depending on yourfacts, how you plan to utilize
the plane and that planning doesneed to be done prior to
closing.
So very worthwhile to checkinto those options.
Speaker 1 (21:26):
Is use tax one time, like after you buy that one time
, or is it every year?
Speaker 2 (21:32):
The former, so it's a one-time tax.
Use tax is kind of brother orsister with sales tax they're
going gonna get you.
It's that one-time tax.
Sales tax is based on whereclosing occurs.
Use tax is based on where theaircraft is, uh based hangar to
be utilized, uh there's alsolet's do something that the tax
(21:54):
is like.
Speaker 1 (21:54):
So when did when do they do is probably the wrong
word, but I feel like I sold myplane and I didn't talk to
someone like you, which I shouldhave, and then it was like nine
months later that I get youknow in the mail hey, by the way
, florida's coming after you forfor you sold it.
Did you collect the money andlike where's our, where's our
cut from your sale?
Um, like when do you?
(22:16):
When do people find out aboutthis?
I mean, imagine you, you dealwith nightmare situations where
a guy buys a jet and then, likesix to nine months later, it's
like here's your bill for$60,000.
Speaker 2 (22:25):
Yeah, it varies from state to state when that
liability is due, but generallyit's pretty soon after the
aircraft is brought back to thehome state.
However, lots of buyers uh, ifthey don't work with us or
someone like us is unaware ofthis liability.
So, as you mentioned, they getblindsided, they close on the
plane.
Let's just say they close onthe plane in Montana, which
famously does not have sales oruse tax, and then they bring the
(22:47):
plane back to their home stateof, let's say, california in
this hypothetical.
So they think, oh, I don't knowany sales tax, I closed on the
plane in Montana.
And then they get a letter fromCalifornia saying hey, we see
that your plane's based inCalifornia.
Why have you not paid us usetax on the purchase price?
of the plane which in Californiais generally around 10%.
(23:08):
They want $100,000.
And if the buyer hasn't met ause tax exemption and is based
in the plane in California, theyare going to owe that liability
.
Speaker 1 (23:16):
And they can't prove that after they close, or just
more difficult for you guys.
Speaker 2 (23:21):
After they close.
If they happen to have met anexemption or are still within
the window to meet an exemption,we can help them document that.
So if you get that letter, dogive us a call and we can see
what the options are at thatpoint in time.
But your options are going to bea lot more limited and it's
going to be trickier at thatpoint, at a minimum versus the
optimal path to proceed is get aplan in place before you close
(23:43):
and understand what all yourobligations are, what the
options are to minimize or deferthose obligations to the extent
possible prior to closing.
Speaker 1 (23:54):
Always learning something from you, kj.
I really appreciate it.
I'm glad we had a chance toshare and definitely, you know,
check outaviationtaskconsultantscom Not
just you know if you need tocontact them for their services,
but they do have an active blog.
Any resources on here you wantto call our attention to?
I noticed you got some stuffgoing on over here.
Look at all these exemptionexperts.
(24:17):
Look at that.
Okay.
Speaker 2 (24:23):
Yeah, Anything else you guys want to share on here?
No, feel free to browse and, asquestions arise, always feel
free to reach out via email orphone call as questions pop up.
The easiest way to get answersis to give us a call and we can
talk about your specific factsand what we could potentially do
to help.
The other item that we did notdiscuss on this podcast is
(24:46):
personal property tax, which isa separate tax from the use tax.
That's the annual liability.
Some states impose personalproperty tax on aircraft.
Other states do not.
Florida, for example, your homestate, Tom they do not impose
personal property tax onaircraft.
Other states do not Florida,for example, your home state,
Tom they do not impose personalproperty tax on aircraft, which
is wonderful.
Other states, it can be fairlysubstantial, you know, in the
(25:09):
vicinity of one, two percent,even close to two and a half
percent of the value of theplane per year.
Speaker 1 (25:16):
All right, well, definitely give you guys a buzz
for sure, as people arepreparing to buy, especially
coming into this fourth quarter.
So, yeah, definitely check outAviation Task Consultants and KJ
.
Thank you once again so muchfor being on the podcast today.
Speaker 2 (25:31):
Yeah, absolutely.
Thanks again for having me on.
All right, kj.
So it's past Thanksgiving, it'sDecember 1st, and I just
announced to my family atThanksgiving dinner that, hey,
I'm going to be buying my veryfirst private jet.
The election's over, mycandidate won, I can't wait.
So here we go.
It's December 1st.
Is it too late for me to buy aprivate jet?
Well, tom, it might be.
(00:20):
Hello everybody and welcome.
My name is Tom Lelio.
I'm your Ultimate Jet Guide andon this channel we pull back
the curtain on private aviationto help you, whether you're a
buyer or an aspiring broker, buyand sell private jets with no
experience necessary.
Today we're tackling theexciting world of aviation taxes
(00:44):
.
Let's go, and so I am bringingon an expert from Aviation Tax
Consultants.
This is KJ McCarter.
Kj, welcome to the podcast.
Speaker 2 (00:55):
Thanks, tom, appreciate having me on again.
Speaker 1 (00:57):
Yeah for sure.
Well, you know, frankly, whathappened was we were just kind
of hanging out and scrolling andI came across an article that
someone at your shop was sharingabout the 60% bonus
depreciation for 2025 aircraftdeliveries, and I had some
(01:18):
questions on it.
I was like, okay, so if I buyan aircraft in 2025, do I get
60%?
And then it was talking tothings like words like place in
service and year end and allthis fun stuff that I'm just
like I don't know what's goingon.
So I wanted to get a chance tospeak with you and just kind of
pick your brain on this wholething, and thank you very much
(01:40):
to you and Aviation TaxesHolston for putting that article
out there.
Speaker 2 (01:43):
Yeah, kyle Kamen from our office prepared that
article and did a great job withit.
It does a good job touchingbase on basically the difference
between placing a plane inservice before the fourth
quarter of the year versuswithin the fourth quarter of
2024.
Because there's a little bitmore depreciation available
potentially if we place the planin service prior to the fourth
(02:05):
quarter beginning versus if wewait until after September 30th.
However, a really importantpiece to discuss here too is
just the fact that if we want totake any deductions in 2024, we
need to place a plan in servicebefore year end.
So it's very very important Evenif you don't close before
September 30th, it's importantthat you close before December
(02:30):
31st and also place the plane inservice, which we can discuss
what that means prior to yearend if you want to depreciate
the plane in 2024.
Because if you close in 2025and place the plane in service
for tax purposes in 2025,depreciation deductions will
begin in 2025.
Speaker 1 (02:46):
Right right, All right.
So let's pull back the curtainhere and start from the very
beginning.
First and foremost, this ideaof buying a jet for tax purposes
basically boils down to if Ibuy a private jet, I can write
off all or part of the purchaseagainst my taxable income, and
(03:07):
so for the last few years itstarted off, I could write the
whole thing off at 100%, andthen, I believe two years ago,
it went down to 80%.
This year we're at 60%.
So if I buy a million dollarjet, I can write off 60% in that
year that I buy it, and thenthe rest of that 40% I can write
off over a longer period oftime.
(03:28):
Do I have it right so far?
Speaker 2 (03:30):
That is a very important piece to remember is
that we are at 60% bonusdepreciation in 2024.
Generally now it's scheduled tophase down to 40% in 2025 and
down 20% each year thereafter,but you're not losing that
amount.
So when we take 60% bonusdepreciation, we're not losing
(03:50):
the other 40%, we're just takingit over a five-year maker's
schedule.
If we take 40% bonusdepreciation in 2025, the other
60% we're taking over afive-year maker's schedule.
So we're still gettingeverything.
It's just over a slightlylonger period of time.
So bonus depreciation in a waythe name is kind of a misnomer.
We're not getting extradepreciation, we're just getting
(04:13):
it faster.
Speaker 1 (04:15):
Gotcha, and so, no matter what, is it always going
to be a five-year depreciationafter you take the bonus part?
Speaker 2 (04:23):
a part 91 plane five-year makers is the
accelerated schedule that we usefor the remainder of the basis
gotcha okay, cool, um.
Speaker 1 (04:31):
But you know, earlier this year, you know I heard
some rumblings around theaviation world that we could
potentially be coming back to.
Uh, there was litigate, therewas laws trying to get past I
think, past the house, if Iremember correctly to try to to
bring back a higher bonusdepreciation.
Do you have any updates on that?
Speaker 2 (04:56):
So that passed the House but unfortunately was
voted against by the Senate.
Down 20% each year unless thereis a new legislation after
November, which some parties inour industry are hopeful that
that will get done afterNovember, but we'll see so as of
now.
The current schedule is we'llhave 40% bonus depreciation in
(05:19):
2025, 60% for 2024.
And then, of course, Section179 is still an option as well.
Speaker 1 (05:27):
Okay, so I want to buy a plane to take a write-off
Now.
Part of what the articlediscussed was the idea that if I
buy a plane before September30th and put it into service
before September 30th, there maybe advantages as opposed to
buying it after September 30thand put it into service before
September 30th.
There may be advantages asopposed to buying it after
September 30th.
(05:47):
So if someone's finding thisvideo just on a whim and it's no
longer 2024, talk to me.
Or maybe they're finding itright now and they're about to
buy a plane and we drop this onSeptember 29th.
Who knows what's the advantageof buying before September 30th
and what happens after September30th?
Speaker 2 (06:07):
Yeah, the the bottom line is if we place the plane in
service before September 30th,we get to use a slightly
different maker schedule basedon that placement service date.
So we can actually write off.
If we're taking bonus, 60%bonus, depreciation as well,
we'd write off about 68% of thebasis in 2024, versus if we
place the plan in service afterSeptember 30th, then we'd write
(06:29):
off about 62%, depreciate about62% of the basis in 2024.
So we lose about 6% if we placethe plan in service after that
date.
So it's important if we want tomaximize the amount of
depreciation that we take in2024, placing in service before
September 30th would be helpful.
Speaker 1 (06:49):
I mean 6%.
I mean that's only about$60,000 on a million dollar
purchase.
So I mean that's chump changefor some people.
Speaker 2 (07:02):
Yeah, the much more important date is December 31st,
gosh let's roll into that.
Yep, if we place the plan inservice in 2024, even if it's in
December, we still get to take60% bonus depreciate.
We get that 62% totaldepreciation in 2024, with the
(07:22):
remaining 38% basis to bedepreciated over a five-year
maker's schedule.
Versus if we wait until January2025, then we don't get to
depreciate the plane until 2025.
So we don't get the deductionin 2025.
Five, we'll only have 40% bonusdepreciation as of now.
(07:42):
So not only do we have aone-year delay, and when we get
to actually take thedepreciation on the plane, we
also have a lower bonusdepreciation rate.
So it's important fortax-motivated buyers that have
lots of taxable income fromtheir business in 2024 to get
the process started with theaircraft search as soon as
(08:04):
possible in order to be able toclose and place a plane in
service before year end of 2024.
Speaker 1 (08:10):
So okay, so I've got a.
I've got a $600,000 tax bill.
I buy a million dollar jet.
If I buy it in 2024, I canwrite off all that tax bill 60%
of a million.
Speaker 2 (08:24):
Of course, call me to confirm the facts related to
your business, Sure sure, sure,I mean an oversimplification and
the math on it.
Speaker 1 (08:33):
that's close to what the math would roughly be.
Speaker 2 (08:36):
Yeah, the napkin math would be if you have $600,000
of taxable income in yourbusiness and you go out and buy
this million dollar plane, thenwe can use the bonus
depreciation deduction from theplane to offset that $600,000 of
taxable income and the taxsavings would be whatever the
(08:56):
marginal tax rate is of thatincome multiplied by the
deduction.
So we get a substantial taxsavings in that scenario and
that's what most of our clientsare motivated to do.
The fourth quarter of the yearis our busiest time of year by
far because our clients are verymotivated to depreciate a plane
this tax year before year end.
Speaker 1 (09:17):
Now if next year I buy a million dollar jet, I have
a $600,000.
If next year I buy a milliondollar jet, I have a $600,000
taxable income, I'm only goingto be able to write off 40% of
the million, or $400,000 tooffset that 600.
And again we're not losing therest of it, but just for that
(09:40):
year, the max I can go againstit would be the 40% 40% plus the
first year of five-year makers.
Speaker 2 (09:42):
But yes, we'll have a smaller deduction in 2025
unless there's legislativechange.
So, as you mentioned, there'snothing being lost.
As long as this taxpayer hassubstantial incomes going into
the future, then they'll stillget to utilize that deduction in
future years, but we don't getas much immediate benefit in
(10:03):
2025.
Speaker 1 (10:05):
All right, well, that's great.
So I'm going to go ahead.
I'm going to set up my pre-buyand I'm scheduled to close on
December 31st, and I'm going totake my first flight on New
Year's Day to take my family outto treat themselves for a brand
new new me, new jet 2025.
Is there any problem with that?
(10:26):
Buying my jet on December 31st,but I don't fly it until the
next day?
Speaker 2 (10:31):
Optimally, we do need to close before year end of
2024.
There's no doubt about that.
And then, optimally, we wouldhave one or more business
flights in 2024 to firmly placethe plane in service for tax
purposes.
However, that's not an absoluterequirement to place the plane
in service.
The requirement is that theplane has to be in a state of
(10:53):
readiness and availability forits intended use.
That actually is quite gray.
There's a lot of nuance there.
Definitely call me or my firmto discuss and we can make sure
that you have a good plan toplace the plane in service prior
to year end.
But and we can make sure thatyou have a good plan to place
the plane in service prior toyear end.
But if we can, we'd like tohave one or more business
flights prior to year end, andit's important that that's a
business flight too.
If we have one entertainmentflight prior to year end and
(11:15):
that's the only use of the planein 2024,.
our business use percentage in2024 is zero, so we wouldn't be
able to take a deductionpercentage in 2024 is zero, so
we wouldn't be able to take adeduction.
Speaker 1 (11:29):
Now I think, yeah, that's really important.
I think you guys outlined thisright.
So what does it mean?
To qualify for the depreciation, we need a binding contract to
purchase by the 31st.
We needed a deposit of either10% or a hundred grand the
lesser of and we need to takedelivery and placing the
aircraft in service by December30th, and that's kind of what
(11:49):
we're talking about right now,and then the depreciation
deduction will be taken.
Okay, so this was a littleconfusing to me.
So, like, I guess I was gettingconfused because they started
throwing out 2020, like buy bythe 24th to qualify for
depreciation in 2025.
And then, like taxes alwaystalk about, like my 2025 taxes
are actually for the 2024 year.
(12:10):
Like, can you, just just so I'mclear?
I was.
I was a little confused on,like, the dates that this thing
is that your blog is talkingabout.
Can you clear that up for me?
Speaker 2 (12:19):
This is a.
This is a completely separateprovision that relates to
placing an order for a new plane.
This is going to deliver in2025.
In that type of scenario, youactually get a one-year delay in
the phase down of the bonusdepreciation rate.
So you could take 60% bonusdepreciation in 2025 for an
aircraft delivering in 2025 andbeing placed in service in 2025.
(12:42):
If you place the order withthese requirements, oh, aircraft
, okay, Okay, okay, okay Okay.
Speaker 1 (12:50):
Oh, this is for the deliveries.
Oh, is this another?
Am I on the wrong blog?
Speaker 2 (12:53):
This is a yeah, that's a, that's a.
Speaker 1 (12:57):
I was on the wrong blog the whole stinking time.
You should have said something,dude.
Okay, this is what we wereoriginally talking about.
Okay, okay, yes, 100% since2017.
Okay, gotcha, gotcha, gotcha,gotcha, okay, okay.
So the biggest thing I imagineit's similar to take deduction
(13:18):
you need a binding contract.
Speaker 2 (13:27):
You need to prove that you closed on the aircraft.
I assume basically yeah, ofcourse we do need to close on
the plane.
That needs to be done If we'rewanting to take 68% in 2024,
that needs to be September 30thor prior.
Uh, after September, september30th it'd be about 62%.
We need to close on the planeand place it in service so that
binding contract language anddeposit language more so applies
to getting that one-year delayin the phase down.
(13:50):
So used aircraft buyers not asrelevant.
Speaker 1 (13:54):
Gotcha, okay, gotcha, all right, well, great.
So I'm about to close, I'mabout to offset my taxes for the
end of the year, but theconversation that this always
comes back to for you and me iswhat are the taxes due at
closing?
Let's run through it again.
(14:15):
Here's my best pitch when I'mtalking to buyers and sellers,
listen, taxes I'm going to dostep by step.
Taxes are the responsibility ofthe seller, true or false?
Speaker 2 (14:28):
Taxes are generally the responsibility of the buyer.
Speaker 1 (14:31):
Okay, oh, the buyer.
Speaker 2 (14:33):
Come on the buyer.
It can be a bit more nuancedthan that in some cases, but
generally speaking, sales taxand use tax and personal
property tax is theresponsibility of the buyer
after they buy the plane.
Speaker 1 (14:46):
So I buy the plane, I have to pay the tax to Florida
and to whatever state Correct.
Speaker 2 (14:54):
The buyer would have that responsibility to the state
where closing occurs if theydon't meet an exemption and
their home state where they basethe plane, where they may have
a use tax liability.
Speaker 1 (15:06):
So that's okay.
So premise number one is taxesare the responsibility of the
buyer.
So if nothing happens, whoeveris owed taxes, they're going to
come after the buyer.
Speaker 2 (15:18):
Correct.
And the exception to that ruleis if we close in a state where
the seller has a sales taxaccount, they may have an
obligation to collect that salestax.
Speaker 1 (15:28):
Oh, that's where I got confused.
Unless presented with anexemption, Otherwise it's a
responsibility.
Okay, is Florida one of thosestates where the seller has the
responsibility to collect?
Speaker 2 (15:39):
If they have a Florida sales tax account, they
would have an obligation tocollect sales tax from the buyer
if closing occurs in Florida asa Florida registered dealer.
If closing is in a neutralstate, generally that liability
just rests with the buyer andthe responsibility rests with
the buyer.
Speaker 1 (15:55):
Okay, okay, so the responsibility rests with the
buyer.
I'm with you so far Now.
So usually it's, and that makessense, because usually it's the
buyer that's asking to closesomewhere else.
The seller's just like take mydebt, okay, that makes more
sense.
So the buyer's the one that'strying to get a tax friendly.
(16:15):
Now we have these things calledflyaway states.
What is that?
Speaker 2 (16:20):
A flyaway state is a state that has an exemption.
That essentially carves out ascenario where a buyer is buying
a plane but they're not goingto base, hangar, utilize,
register the plane in that state.
They're just picking up theplane and leaving.
So the state says, hey, youdon't owe a sales tax in that
scenario.
(16:40):
Lots of states have that typeof flyaway exemption, but there
are some that don't.
So it is a very important partof the tax planning process to
select a tax-friendly state forclosing.
Fortunately there's a lot ofthem.
So if pre-buy is occurring in astate that is not tax friendly
for closing, they don't have aflyaway exemption.
We will help the buyer identifya nearby tax friendly state to
(17:06):
reposition the plate you'reproposing.
Speaker 1 (17:08):
So if you have a seller up north, let's say
Massachusetts, you've got abuyer elsewhere that wants to
close in South Carolina, southcarolina, I don't know if I
guess let me preface this Idon't know if they want to close
in south carolina because it'sa tax friendly or b, a flyway
(17:29):
state, or b or c, both or d, not, not none of the other.
I don't know if they are theyrelated.
Is a flyway state necessarily atax friendly state or it's just
that you can get it out ofthere easily?
But it doesn't necessarily meanit's be, because I imagine
South Carolina has some kind ofspecial sauce.
Everybody wants to close there.
Speaker 2 (17:47):
A flyaway state is tax-friendly if the buyer can
meet that flyaway exemption.
But there are states that aretax-friendly without being a
flyaway state.
The reason that South Carolinais tax friendly for closing is
not because it has a flyawayexemption, but rather that its
sales tax is capped at $500.
So obviously a de minimisamount when it comes to an
(18:08):
aircraft transaction.
So lots of aircraftacquisitions close in South
Carolina for that reason.
Speaker 1 (18:16):
Okay, so I'm a buyer.
I'm a buyer, so it doesn'tmatter that the planes in.
Well, it matters that theplanes in Florida getting the
pre-buy because I can, I canleave Florida and close on it
without having to.
Well, oh no, the point of theflyway exemption is because I
can close and go away andFlorida is not going to chase me
(18:36):
.
That's the point of the flyway.
I'm going to close here andthey're not going to chase me,
but I might still be on the hookfor wherever I close, Like I
might go to.
Uh, where's a terrible place?
New York, I just just guessing.
I might fly, you know, to NewYork and get really smacked over
the head.
Or California and get smackedover the head with tax If I
close there.
Speaker 2 (18:57):
Correct the closing location is what matters.
Now, surprisingly, New York isactually friendly.
They don't have sales or usetax on aircraft.
Oh okay, California does have aflyaway exemption.
It's not the best flyawayexemption though Okay, don't
need to go too deep into theweeds on that one but both are
friendlier than you would think.
Places that are not friendly toclose, that don't have flyaway
(19:17):
exemptions.
That is an important piece toconsider, and what matters is
where we close, not necessarilywhere pre-buy is.
So pre-buy can take place inOhio, for example, which doesn't
have a flyaway exemption.
That's not an issue from a taxperspective, as long as we can
reposition the plane from Ohiopost pre-buy but pre-closing to
(19:40):
another state that does have anexemption that we can meet or
otherwise, we're able to beexempt from sales tax.
So, for example, pre-buys thathappen in Ohio, it's very common
for the plane to berepositioned to Indiana for
closing because Indiana has afriendly flyway exemption.
Speaker 1 (19:55):
Right Now.
I go to South Carolina, I go toIndiana.
I pay my sales tax on thetransaction, but now I need to
worry about, as the buyer, whereI'm going to be using the
aircraft.
Is that right?
Speaker 2 (20:09):
That's correct.
So we close on the plane in asales tax friendly state that we
help you identify, we meet aflyaway exemption or otherwise
close somewhere that has minimalsales tax or doesn't have sales
tax on aircraft or doesn't havesales tax at all.
But then the plane comes backto the home state where the
buyer is going to base thatplane and hangar it and utilize
(20:29):
it.
So let's say, for the sake ofthis example, it's Florida where
you're based on.
When the plane comes back toFlorida, even if we closed in
Indiana, which was sales taxfriendly, florida would like to
collect use tax on the planeunless we meet some sort of
exemption, and that use tax is6% plus a little bit of local.
So if it's a million dollarplane, a little over $60,000.
(20:52):
So that's obviously a veryimportant planning topic amongst
our client base.
See, a very important planningtopic amongst our client base
and generally in most states wedo have use tax planning options
to defer or be exempt from thatliability.
It varies widely from state tostate.
You absolutely, if you're anaircraft buyer, you should be
calling a firm like mine orsimilar to talk about what your
(21:15):
options are, depending on yourfacts, how you plan to utilize
the plane and that planning doesneed to be done prior to
closing.
So very worthwhile to checkinto those options.
Speaker 1 (21:26):
Is use tax one time, like after you buy that one time
, or is it every year?
Speaker 2 (21:32):
The former, so it's a one-time tax.
Use tax is kind of brother orsister with sales tax they're
going gonna get you.
It's that one-time tax.
Sales tax is based on whereclosing occurs.
Use tax is based on where theaircraft is, uh based hangar to
be utilized, uh there's alsolet's do something that the tax
(21:54):
is like.
Speaker 1 (21:54):
So when did when do they do is probably the wrong
word, but I feel like I sold myplane and I didn't talk to
someone like you, which I shouldhave, and then it was like nine
months later that I get youknow in the mail hey, by the way
, florida's coming after you forfor you sold it.
Did you collect the money andlike where's our, where's our
cut from your sale?
Um, like when do you?
(22:16):
When do people find out aboutthis?
I mean, imagine you, you dealwith nightmare situations where
a guy buys a jet and then, likesix to nine months later, it's
like here's your bill for$60,000.
Speaker 2 (22:25):
Yeah, it varies from state to state when that
liability is due, but generallyit's pretty soon after the
aircraft is brought back to thehome state.
However, lots of buyers uh, ifthey don't work with us or
someone like us is unaware ofthis liability.
So, as you mentioned, they getblindsided, they close on the
plane.
Let's just say they close onthe plane in Montana, which
famously does not have sales oruse tax, and then they bring the
(22:47):
plane back to their home stateof, let's say, california in
this hypothetical.
So they think, oh, I don't knowany sales tax, I closed on the
plane in Montana.
And then they get a letter fromCalifornia saying hey, we see
that your plane's based inCalifornia.
Why have you not paid us usetax on the purchase price?
of the plane which in Californiais generally around 10%.
(23:08):
They want $100,000.
And if the buyer hasn't met ause tax exemption and is based
in the plane in California, theyare going to owe that liability
.
Speaker 1 (23:16):
And they can't prove that after they close, or just
more difficult for you guys.
Speaker 2 (23:21):
After they close.
If they happen to have met anexemption or are still within
the window to meet an exemption,we can help them document that.
So if you get that letter, dogive us a call and we can see
what the options are at thatpoint in time.
But your options are going to bea lot more limited and it's
going to be trickier at thatpoint, at a minimum versus the
optimal path to proceed is get aplan in place before you close
(23:43):
and understand what all yourobligations are, what the
options are to minimize or deferthose obligations to the extent
possible prior to closing.
Speaker 1 (23:54):
Always learning something from you, kj.
I really appreciate it.
I'm glad we had a chance toshare and definitely, you know,
check outaviationtaskconsultantscom Not
just you know if you need tocontact them for their services,
but they do have an active blog.
Any resources on here you wantto call our attention to?
I noticed you got some stuffgoing on over here.
Look at all these exemptionexperts.
(24:17):
Look at that.
Okay.
Speaker 2 (24:23):
Yeah, Anything else you guys want to share on here?
No, feel free to browse and, asquestions arise, always feel
free to reach out via email orphone call as questions pop up.
The easiest way to get answersis to give us a call and we can
talk about your specific factsand what we could potentially do
to help.
The other item that we did notdiscuss on this podcast is
(24:46):
personal property tax, which isa separate tax from the use tax.
That's the annual liability.
Some states impose personalproperty tax on aircraft.
Other states do not.
Florida, for example, your homestate, Tom they do not impose
personal property tax onaircraft.
Other states do not Florida,for example, your home state,
Tom they do not impose personalproperty tax on aircraft, which
is wonderful.
Other states, it can be fairlysubstantial, you know, in the
(25:09):
vicinity of one, two percent,even close to two and a half
percent of the value of theplane per year.
Speaker 1 (25:16):
All right, well, definitely give you guys a buzz
for sure, as people arepreparing to buy, especially
coming into this fourth quarter.
So, yeah, definitely check outAviation Task Consultants and KJ
.
Thank you once again so muchfor being on the podcast today.
Speaker 2 (25:31):
Yeah, absolutely.
Thanks again for having me on.
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