By Here are some important tax strategies for your aircraft operations that could help you overcome passive loss limitations and maximize your deductions.
Understanding Passive Activity Limitations
The IRS’s passive activity loss rules can prevent you from using aircraft-related losses to offset other income. If the tax code classifies your aircraft operations as passive, you may be stuck with unused losses until you dispose of the aircraft or generate passive income in future years.
Avoid Common Traps
Trap 1. Leasing your aircraft in a separate entity. Leasing the aircraft to your business through a separate entity can trigger passive loss rules. However, you can avoid this classification by
- ensuring the lease qualifies for exceptions (such as short-term leases or providing a flight crew) and
- demonstrating material participation (e.g., 500 hours of involvement annually).
Trap 2. Leasing to third-party charters. Leasing your aircraft to a third-party charter like NetJets may convert your business asset into a rental asset, subject to passive loss rules. It’s best not to engage in third-party leasing if you want to claim the aircraft losses.
Strategies to Overcome Passive Loss Rules
Material participation. Ensure you meet one of the IRS tests for material participation in your aircraft leasing activity. This can help establish the activity as non-passive, allowing you to deduct the losses.
Grouping election. Consider grouping the aircraft activity with another active business (like your medical practice) to treat both as non-passive. This strategy helps avoid passive loss limitations and allows for deductions, provided the grouping constitutes an appropriate economic unit.
Restrictions for Closely Held C Corporations
If your business is a closely held C corporation, the grouping election does not apply. You must consider other strategies to avoid the passive loss limitations.
As you can see, getting the deductions you want from your aircraft is tricky. If you want to discuss tax strategies for your aircraft operations, please call me on my direct line at 408-778-9651.