Many pilots don’t know this little secret…
The majority of rental aircraft they fly at their local flight schools are actually owned by pilot investors who placed the plane on “leaseback” with the school as an investment and potential tax savings strategy.
What is a Leaseback?
A leaseback is a common practice in the flight training business whereby an independent investor, typically a pilot or student pilot, acquires an aircraft and provides that aircraft for rental through their local flight school who acts as a marketing partner. This business arrangement has many advantages, some disadvantages and numerous things to know about regarding setup, tax savings, compliance and how to move to the next aircraft when the time comes. With all things considered it can be an ideal way for pilots that want to obtain all their ratings and do lots of flying with a very economically advantaged approach. Its not for everyone but if you have not explored the potential and you are considering or dreaming of aircraft ownership, you are trying to find a way to build lots of time, or you could really use some potential tax relief, this approach may be for you.
Why do pilots do this?
There are some very simple motivations that support the industry system of leasebacks for flight schools.
1.) The pilot plans to do a lot of training or flying and they are motivated to reduce their cost of access to a plane.
2.) The pilot discovers the unique tax advantages of leasebacks and is motivated by the opportunity to reduce their taxable income while obtaining their aircraft while having others pay for it. This potential is extremely significant in many cases, especially in 2013.
3.) Often times they want to have access to a plane that is not available for rent in the local area. For example lets say the pilot is getting involved with aviation and has already decided he wants to fly a modern glass panel aircraft but there are not any at his local flight school. He buys one and leases it back thus getting the plane he is interested in using while others contribute to his dreams financially and he likely enjoys tax savings personally in the year of purchase.
4.) They know they will only use the plane for say 100 hours a year and like the idea of the plane helping to pay for itself.
What are the potential tax advantages?
The federal tax system provides businesses incentives to make investments in equipment that come in the form of accelerated depreciation. An investor that sets up a company to acquire an aircraft and market it for rental is a business that may qualify for these incentives. Congress changes the rules, limits and terms of the how businesses can deduct purchased equipment from time to time and sets dates when various rule apply or expire.
At the end of 2013 the current tax code incentives expire and return from there current extremely generous limits and application to our previously very conservative limits. Specifically, right now in 2013 aircraft placed in service can qualify for Section 179 deductibility for used equipment up to $500,000 and new aircraft also qualify for Bonus Depreciation up to $500,000. There is a phase out above $500,000 of these incentives but this is the most generous treatment we have seen in more than a decade. January 2014 the Bonus depreciation goes away and Section 179 goes back to a very low limit on only $25,000. A HUGE difference.
Assuming an investor properly sets up the purchase and leaseback business this year before the end of 2013 it means that the buyer could potentially write off the entire value of the aircraft acquired in some cases. This generates a direct reduction in either business profits or in most cases of LLC pass through, a reduction of personal income on paper which means direct tax savings at the rate of whatever the marginal rate is of the taxpayer. Translated this means that an investor can usually get more back in tax savings than is required for the downpayment on the aircraft. Once the plane is in service and it covers its expenses the entire arrangement was actually cash flow positive to purchase. Hopefully now you understand the compelling nature of it all… the buyer gets the plane they want, saves taxes the year of purchase and others help pay for the aircraft.
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What you need to know about the Current Tax Law
The answer to this question is VERY SIMPLE… the amazing incentives that exist in 2013 expire at the end of the year. If you are a potential candidate for the purchase of an aircraft and are our could consider structuring your aircraft for leaseback with a flight school… you need to get moving and get this all in place before the end of the year. Aircraft must be in service before the end of the year. There is a provision for Bonus depreciation on orders of new aircraft delivered in 2014 for the 2014 tax year as the only hold over of the current law. We don’t know if Congress will make any changes to our tax code in this area in 2014 or when this level of generous benefits may ever come around again.
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Guaranteed Income?
A leaseback is a business and there are no guarantees an investor will break even. One of the things that potential leaseback buyers are concerned about is how long it will take to get them to a regular rental income to cover their aircraft. This is usually their biggest worry getting into this arrangement. The innovative folks at Dominion Aircraft Sales that support a large network of Diamond Flight Centers came up with their Lease & Learn Program (diamondleaseback.com) The program provides 25 hours of guaranteed income for the buyer for the first year that invest in DA20 or DA40 aircraft to go into service at a participating Diamond Flight Center. So if the aircraft is down for 3 weeks and you don’t make the hour goal for a particular month you still have income to pay the note and other expenses. The program has the added benefit of manufacturer warranty to cover unexpected expenses. These type of programs are rare and typically limited time offers as well but definitely worth checking out.
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A note about compliance
The structure, setup, implementation, reporting and attention to compliance are all vital to successfully enjoyment of the benefits of a leaseback arrangement. Use the info in this article as a motivation to research your options and obtain professional assistance both legal and accounting before making a move. Aircraft distributors that regularly assist clients to obtain aircraft for leaseback are a great resource to contact for referrals to the appropriate professionals. But time is ticking…and soon the most impressive incentives we’ve ever seen will expire and leave many folks wanting for that perfect aircraft and great tax treatment.
Resource for more information
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John Armstrong
Diamond Regional Distribution Center
Dominion Aircraft Sales
www.flydominion.com
406-FLY-1NOW / 406-359-1669
