Speaker 1: 0:00

All right, kj. So it's past Thanksgiving, it's December 1st, and I just announced to my family at Thanksgiving dinner that, hey, I'm going to be buying my very first private jet. The election's over, my candidate won, I can't wait. So here we go. It's December 1st. Is it too late for me to buy a private jet? Well, tom, it might be. Hello everybody and welcome. My name is Tom Lelio. I'm your Ultimate Jet Guide and on this channel we pull back the curtain on private aviation to help you, whether you're a buyer or an aspiring broker, buy and sell private jets with no experience necessary. Today we're tackling the exciting world of aviation taxes. Let's go, and so I am bringing on an expert from Aviation Tax Consultants. This is KJ McCarter. Kj, welcome to the podcast.

Speaker 2: 0:55

Thanks, tom, appreciate having me on again.

Speaker 1: 0:57

Yeah for sure. Well, you know, frankly, what happened was we were just kind of hanging out and scrolling and I came across an article that someone at your shop was sharing about the 60% bonus depreciation for 2025 aircraft deliveries, and I had some questions on it. I was like, okay, so if I buy an aircraft in 2025, do I get 60%? And then it was talking to things like words like place in service and year end and all this fun stuff that I'm just like I don't know what's going on. So I wanted to get a chance to speak with you and just kind of pick your brain on this whole thing, and thank you very much to you and Aviation Taxes Holston for putting that article out there.

Speaker 2: 1:43

Yeah, kyle Kamen from our office prepared that article and did a great job with it. It does a good job touching base on basically the difference between placing a plane in service before the fourth quarter of the year versus within the fourth quarter of 2024. Because there's a little bit more depreciation available potentially if we place the plan in service prior to the fourth quarter beginning versus if we wait until after September 30th. However, a really important piece to discuss here too is just the fact that if we want to take any deductions in 2024, we need to place a plan in service before year end.

Speaker 2: 2:21

So it's very very important Even if you don't close before September 30th, it's important that you close before December 31st and also place the plane in service, which we can discuss what that means prior to year end if you want to depreciate the plane in 2024. Because if you close in 2025 and place the plane in service for tax purposes in 2025, depreciation deductions will begin in 2025.

Speaker 1: 2:46

Right right, All right. So let's pull back the curtain here and start from the very beginning. First and foremost, this idea of buying a jet for tax purposes basically boils down to if I buy a private jet, I can write off all or part of the purchase against my taxable income, and so for the last few years it started off, I could write the whole thing off at 100%, and then, I believe two years ago, it went down to 80%. This year we're at 60%. So if I buy a million dollar jet, I can write off 60% in that year that I buy it, and then the rest of that 40% I can write off over a longer period of time. Do I have it right so far?

Speaker 2: 3:30

That is a very important piece to remember is that we are at 60% bonus depreciation in 2024.

Speaker 2: 3:36

Generally now it's scheduled to phase down to 40% in 2025 and down 20% each year thereafter, but you're not losing that amount. So when we take 60% bonus depreciation, we're not losing the other 40%, we're just taking it over a five-year maker's schedule. If we take 40% bonus depreciation in 2025, the other 60% we're taking over a five-year maker's schedule. So we're still getting everything. It's just over a slightly longer period of time. So bonus depreciation in a way the name is kind of a misnomer. We're not getting extra depreciation, we're just getting it faster.

Speaker 1: 4:15

Gotcha, and so, no matter what, is it always going to be a five-year depreciation after you take the bonus part?

Speaker 2: 4:23

a part 91 plane five-year makers is the accelerated schedule that we use for the remainder of the basis gotcha okay, cool, um.

Speaker 1: 4:31

But you know, earlier this year, you know I heard some rumblings around the aviation world that we could potentially be coming back to. Uh, there was litigate, there was laws trying to get past I think, past the house, if I remember correctly to try to to bring back a higher bonus depreciation. Do you have any updates on that?

Speaker 2: 4:56

So that passed the House but unfortunately was voted against by the Senate. Down 20% each year unless there is a new legislation after November, which some parties in our industry are hopeful that that will get done after November, but we'll see so as of now. The current schedule is we'll have 40% bonus depreciation in 2025, 60% for 2024. And then, of course, Section 179 is still an option as well.

Speaker 1: 5:27

Okay, so I want to buy a plane to take a write-off Now. Part of what the article discussed was the idea that if I buy a plane before September 30th and put it into service before September 30th, there may be advantages as opposed to buying it after September 30th and put it into service before September 30th. There may be advantages as opposed to buying it after September 30th. So if someone's finding this video just on a whim and it's no longer 2024, talk to me. Or maybe they're finding it right now and they're about to buy a plane and we drop this on September 29th. Who knows what's the advantage of buying before September 30th and what happens after September 30th?

Speaker 2: 6:07

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 based on 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 the basis in 2024, versus if we place the plan in service after September 30th, then we'd write off about 62%, depreciate about 62% of the basis in 2024. So we lose about 6% if we place the plan in service after that date. So it's important if we want to maximize the amount of depreciation that we take in 2024, placing in service before September 30th would be helpful.

Speaker 1: 6:49

I mean 6%. I mean that's only about $60,000 on a million dollar purchase. So I mean that's chump change for some people.

Speaker 2: 7:02

Yeah, the much more important date is December 31st, gosh let's roll into that.

Speaker 2: 7:09

Yep, if we place the plan in service in 2024, even if it's in December, we still get to take 60% bonus depreciate. We get that 62% total depreciation in 2024, with the remaining 38% basis to be depreciated over a five-year maker's schedule. Versus if we wait until January 2025, then we don't get to depreciate the plane until 2025. So we don't get the deduction in 2025. Five, we'll only have 40% bonus depreciation as of now. So not only do we have a one-year delay, and when we get to actually take the depreciation on the plane, we also have a lower bonus depreciation rate. So it's important for tax-motivated buyers that have lots of taxable income from their business in 2024 to get the process started with the aircraft search as soon as possible in order to be able to close and place a plane in service before year end of 2024.

Speaker 1: 8:10

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 can write off all that tax bill 60% of a million.

Speaker 2: 8:24

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: 8:33

that's close to what the math would roughly be.

Speaker 2: 8:36

Yeah, the napkin math would be if you have $600,000 of taxable income in your business and you go out and buy this million dollar plane, then we can use the bonus depreciation deduction from the plane to offset that $600,000 of taxable income and the tax savings would be whatever the marginal tax rate is of that income multiplied by the deduction. So we get a substantial tax savings in that scenario and that's what most of our clients are motivated to do. The fourth quarter of the year is our busiest time of year by far because our clients are very motivated to depreciate a plane this tax year before year end.

Speaker 1: 9:17

Now if next year I buy a million dollar jet, I have a $600,000. If next year I buy a million dollar jet, I have a $600,000 taxable income, I'm only going to be able to write off 40% of the million, or $400,000 to offset that 600. And again we're not losing the rest of it, but just for that year, the max I can go against it would be the 40% 40% plus the first year of five-year makers.

Speaker 2: 9:42

But yes, we'll have a smaller deduction in 2025 unless there's legislative change. So, as you mentioned, there's nothing being lost. As long as this taxpayer has substantial incomes going into the future, then they'll still get to utilize that deduction in future years, but we don't get as much immediate benefit in 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-buy and I'm scheduled to close on December 31st, and I'm going to take my first flight on New Year's Day to take my family out to treat themselves for a brand new new me, new jet 2025. Is there any problem with that? 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 would have one or more business flights in 2024 to firmly place the plane in service for tax purposes. However, that's not an absolute requirement to place the plane in service. The requirement is that the plane has to be in a state of readiness and availability for its intended use. That actually is quite gray. There's a lot of nuance there. Definitely call me or my firm to discuss and we can make sure that you have a good plan to place the plane in service prior to year end. But and we can make sure that you have a good plan to place the plane in service prior to year end. But if we can, we'd like to have one or more business flights prior to year end, and it's important that that's a business flight too. If we have one entertainment flight prior to year end and that's the only use of the plane in 2024,.

Speaker 2: 11:18

our business use percentage in 2024 is zero, so we wouldn't be able to take a deduction percentage in 2024 is zero, so we wouldn't be able to take a deduction.

Speaker 1: 11:29

Now I think, yeah, that's really important. I think you guys outlined this right. 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 either 10% or a hundred grand the lesser of and we need to take delivery and placing the aircraft in service by December 30th, and that's kind of what we're talking about right now, and then the depreciation deduction will be taken. Okay, so this was a little confusing to me. So, like, I guess I was getting confused because they started throwing out 2020, like buy by the 24th to qualify for depreciation in 2025. And then, like taxes always talk about, like my 2025 taxes are actually for the 2024 year. Like, can you, just just so I'm clear? I was. I was a little confused on, like, the dates that this thing is that your blog is talking about. Can you clear that up for me?

Speaker 2: 12:19

This is a. This is a completely separate provision that relates to placing an order for a new plane. This is going to deliver in 2025. In that type of scenario, you actually get a one-year delay in the phase down of the bonus depreciation rate. So you could take 60% bonus depreciation in 2025 for an aircraft delivering in 2025 and being placed in service in 2025. If you place the order with these 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 were originally talking about. Okay, okay, yes, 100% since 2017. Okay, gotcha, gotcha, gotcha, gotcha, okay, okay. So the biggest thing I imagine it's similar to take deduction you need a binding contract.

Speaker 2: 13:27

You need to prove that you closed on the aircraft. I assume basically yeah, of course we do need to close on the plane. That needs to be done If we're wanting to take 68% in 2024, that needs to be September 30th or prior. Uh, after September, september 30th it'd be about 62%. We need to close on the plane and place it in service so that binding contract language and deposit language more so applies to getting that one-year delay in the phase down. So used aircraft buyers not as relevant.

Speaker 1: 13:54

Gotcha, okay, gotcha, all right, well, great. So I'm about to close, I'm about to offset my taxes for the end of the year, but the conversation that this always comes back to for you and me is what are the taxes due at closing? Let's run through it again. Here's my best pitch when I'm talking to buyers and sellers, listen, taxes I'm going to do step by step. Taxes are the responsibility of the 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 nuanced than that in some cases, but generally speaking, sales tax and use tax and personal property tax is the responsibility 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 they don't meet an exemption and their home state where they base the plane, where they may have a use tax liability.

Speaker 1: 15:06

So that's okay. So premise number one is taxes are the responsibility of the buyer. So if nothing happens, whoever is owed taxes, they're going to come after the buyer.

Speaker 2: 15:18

Correct. And the exception to that rule is if we close in a state where the seller has a sales tax account, they may have an obligation to collect that sales tax.

Speaker 1: 15:28

Oh, that's where I got confused. Unless presented with an exemption, Otherwise it's a responsibility. Okay, is Florida one of those states 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 to collect sales tax from the buyer if closing occurs in Florida as a Florida registered dealer. If closing is in a neutral state, generally that liability just rests with the buyer and the 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 makes sense, because usually it's the buyer that's asking to close somewhere else. The seller's just like take my debt, okay, that makes more sense. So the buyer's the one that's trying to get a tax friendly. Now we have these things called flyaway states. What is that?

Speaker 2: 16:20

A flyaway state is a state that has an exemption. That essentially carves out a scenario where a buyer is buying a plane but they're not going to base, hangar, utilize, register the plane in that state. They're just picking up the plane and leaving. So the state says, hey, you don't owe a sales tax in that scenario. Lots of states have that type of flyaway exemption, but there are some that don't. So it is a very important part of the tax planning process to select a tax-friendly state for closing. Fortunately there's a lot of them. So if pre-buy is occurring in a state that is not tax friendly for closing, they don't have a flyaway exemption. We will help the buyer identify a nearby tax friendly state to reposition the plate you're proposing.

Speaker 1: 17:08

So if you have a seller up north, let's say Massachusetts, you've got a buyer elsewhere that wants to close in South Carolina, south carolina, I don't know if I guess let me preface this I don't know if they want to close in south carolina because it's a tax friendly or b, a flyway state, or b or c, both or d, not, not none of the other. I don't know if they are they related. Is a flyway state necessarily a tax friendly state or it's just that you can get it out of there easily? But it doesn't necessarily mean it's be, because I imagine South Carolina has some kind of special 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 are tax-friendly without being a flyaway state. The reason that South Carolina is tax friendly for closing is not because it has a flyaway exemption, but rather that its sales tax is capped at $500. So obviously a de minimis amount when it comes to an aircraft transaction. So lots of aircraft acquisitions close in South Carolina for that reason.

Speaker 1: 18:16

Okay, so I'm a buyer. I'm a buyer, so it doesn't matter that the planes in. Well, it matters that the planes in Florida getting the pre-buy because I can, I can leave Florida and close on it without having to. Well, oh no, the point of the flyway exemption is because I can close and go away and Florida is not going to chase me. That's the point of the flyway. I'm going to close here and they're not going to chase me, but I might still be on the hook for 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 New York and get really smacked over the head. Or California and get smacked over the head with tax If I close there.

Speaker 2: 18:57

Correct the closing location is what matters. Now, surprisingly, New York is actually friendly. They don't have sales or use tax on aircraft. Oh okay, California does have a flyaway exemption.

Speaker 2: 19:05

It's not the best flyaway exemption though Okay, don't need to go too deep into the weeds on that one but both are friendlier than you would think. Places that are not friendly to close, that don't have flyaway exemptions. That is an important piece to consider, and what matters is where we close, not necessarily where pre-buy is. So pre-buy can take place in Ohio, for example, which doesn't have a flyaway exemption. That's not an issue from a tax perspective, as long as we can reposition the plane from Ohio post pre-buy but pre-closing to another state that does have an exemption that we can meet or otherwise, we're able to be exempt from sales tax. So, for example, pre-buys that happen in Ohio, it's very common for the plane to be repositioned to Indiana for closing because Indiana has a friendly flyway exemption.

Speaker 1: 19:55

Right Now. I go to South Carolina, I go to Indiana. I pay my sales tax on the transaction, but now I need to worry about, as the buyer, where I'm going to be using the aircraft. Is that right?

Speaker 2: 20:09

That's correct. So we close on the plane in a sales tax friendly state that we help you identify, we meet a flyaway exemption or otherwise close somewhere that has minimal sales tax or doesn't have sales tax on aircraft or doesn't have sales tax at all. But then the plane comes back to the home state where the buyer is going to base that plane and hangar it and utilize it. So let's say, for the sake of this example, it's Florida where you're based on. When the plane comes back to Florida, even if we closed in Indiana, which was sales tax friendly, florida would like to collect use tax on the plane unless we meet some sort of exemption, and that use tax is 6% plus a little bit of local. So if it's a million dollar plane, a little over $60,000.

Speaker 2: 20:52

So that's obviously a very important planning topic amongst our client base. See, a very important planning topic amongst our client base and generally in most states we do have use tax planning options to defer or be exempt from that liability. It varies widely from state to state. You absolutely, if you're an aircraft buyer, you should be calling a firm like mine or similar to talk about what your options are, depending on your facts, how you plan to utilize the plane and that planning does need to be done prior to closing. So very worthwhile to check into 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 or sister with sales tax they're going gonna get you. It's that one-time tax. Sales tax is based on where closing occurs. Use tax is based on where the aircraft is, uh based hangar to be utilized, uh there's also let's do something that the tax is like.

Speaker 1: 21:54

So when did when do they do is probably the wrong word, but I feel like I sold my plane and I didn't talk to someone like you, which I should have, and then it was like nine months later that I get you know in the mail hey, by the way, florida's coming after you for for you sold it. Did you collect the money and like where's our, where's our cut from your sale? Um, like when do you? When do people find out about this? I mean, imagine you, you deal with nightmare situations where a guy buys a jet and then, like six 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 generally it's pretty soon after the aircraft is brought back to the home state. However, lots of buyers uh, if they don't work with us or someone like us is unaware of this liability. So, as you mentioned, they get blindsided, they close on the plane. Let's just say they close on the plane in Montana, which famously does not have sales or use tax, and then they bring the plane back to their home state of, let's say, california in this hypothetical. So they think, oh, I don't know any sales tax, I closed on the plane in Montana. And then they get a letter from California saying hey, we see that your plane's based in California. Why have you not paid us use tax on the purchase price?

Speaker 2: 23:07

of the plane which in California is generally around 10%. They want $100,000. And if the buyer hasn't met a use tax exemption and is based in the plane in California, they are 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 an exemption or are still within the window to meet an exemption, we can help them document that. So if you get that letter, do give us a call and we can see what the options are at that point in time.

Speaker 2: 23:33

But your options are going to be a lot more limited and it's going to be trickier at that point, at a minimum versus the optimal path to proceed is get a plan in place before you close and understand what all your obligations are, what the options are to minimize or defer those 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 to share and definitely, you know, check out aviationtaskconsultantscom Not just you know if you need to contact them for their services, but they do have an active blog. Any resources on here you want to call our attention to? I noticed you got some stuff going on over here. Look at all these exemption experts. Look at that. Okay.

Speaker 2: 24:23

Yeah, Anything else you guys want to share on here? No, feel free to browse and, as questions arise, always feel free to reach out via email or phone call as questions pop up. The easiest way to get answers is to give us a call and we can talk about your specific facts and what we could potentially do to help. The other item that we did not discuss on this podcast is personal property tax, which is a separate tax from the use tax. That's the annual liability. Some states impose personal property tax on aircraft. Other states do not. Florida, for example, your home state, Tom they do not impose personal property tax on aircraft. Other states do not Florida, for example, your home state, Tom they do not impose personal property tax on aircraft, which is wonderful.

Speaker 2: 25:05

Other states, it can be fairly substantial, you know, in the vicinity of one, two percent, even close to two and a half percent of the value of the plane per year.

Speaker 1: 25:16

All right, well, definitely give you guys a buzz for sure, as people are preparing to buy, especially coming into this fourth quarter. So, yeah, definitely check out Aviation Task Consultants and KJ. Thank you once again so much for being on the podcast today.

Speaker 2: 25:31

Yeah, absolutely. Thanks again for having me on.