Ari Good of Good Attorneys At Law, P.A. represents aircraft owners and operators facing federal income tax audits, state sales tax audits, and other aircraft tax matters.
IRS aircraft audits typically consider some of the following issues:
State Sales and Use Tax Audits
- Passive Activity Losses - The IRS may challenge whether the tax deductions from your aircraft activity generated "passive losses". Under federal income tax law, passive losses may only be deducted to the extent of passive income, such as rental real estate income (except for real estate professionals), royalties and income from businesses in which you do not materially participate. To defend against this type of attack, you must show the relationship between your active trade or business and your aircraft activity. A skilled aircraft tax attorney can help you establish this relationship.
- Hobby Loss - The IRS may allege that you may not take depreciation allowances and the costs of owning your aircraft because you use the plane as a hobbyist, rather than for business purposes. They key to defending this issue is, as in many areas of audit defense, having proper documentation of your business use of the plane. This should include detailed flight logs showing the business purpose for the flight, plus any records reflecting the business use of your plane.
- "Qualified Business Use" - A key consideration among aircraft owners is whether they have sufficient "qualified" business use. Showing that you have sufficient business use as a percentage of all use is critical to supporting an accelerated depreciation schedule and 100% deductibility of your aircraft expenses. Proper planning includes 51% or greater use of your aircraft directly by or for your principal business, exclusive of personal entertainment or personal non-entertainment use.
- Excessive Personal Use - Your aircraft deductions can be disallowed for use of the aircraft for "entertainment" purposes. One of the ways to avoid this result is to have a thorough understanding of the circumstances that separate "entertainment" from "non-entertainment" use of your aircraft. Consult an experienced aviation tax attorney for guidance as to how to properly track and report these distinct types of aircraft use.
In an era of declining revenues, state departments of revenue are looking very carefully at records of aircraft coming into and leaving the state. The states often use commercial tracking services like FlightAware to select tail numbers. These tail numbers are cross referenced against the owner's information, providing the auditing authority with information they use to evaluate whether the owner, or operator, has "nexus" with that state. If they find such a connection, the state will inquire as to whether you have paid sales (or, in the case of aircraft purchased elsewhere and returned to the state), use tax on the purchase price. While state legislation is constantly evolving, the following are common factors to consider in protecting yourself from a state tax audit:
- Whether you maintain a personal residence in the state into which you are flying
- Whether your business has its principal place of business is in the state
- Whether you or your business owns commercial property in the state, or maintains a full time sales office
- What is your previous history of presence in the state, including whether you have ever lived there
Contact a skilled aviation tax attorney
if you receive a notice that you are being audited either by the IRS or a state department of revenue. Follow the most recent aviation news, updates and analysis on our aviation blog
Ari Good, Esq.
Good Attorneys At Law, PA
7935 Aircraft Pulling Rd N - Ste 216
Naples, FL 34109
Aviation tax lawyer Miami