Author: Leon Clinton

Tax

Avoiding Tax Pitfalls of Aircraft Ownership in an S Corporation

As you likely know, S corporations can offer numerous advantages, such as tax efficiency, ease of ownership, and operational simplicity.

But there are specific pitfalls associated with an S corporation owning an aircraft. Here are the top pitfalls, along with strategies to mitigate the tax issue.

Basis Limitations

The tax code imposes significant restrictions on deducting losses for S corporation owners. If your S corporation purchases the aircraft and uses third-party debt, you get no basis increase for the debt. Thus, third-party debt can destroy many of the write-offs you hoped for.

Tip. Avoid third-party debt financing for aircraft purchases by an S corporation. Instead, use cash, or take a personal loan and contribute the proceeds to the S corporation to increase your basis.

Depreciation Recapture

Your S corporation aircraft must have over 50 percent business use to create substantial first-year depreciation deductions. If business use falls below this threshold during the aircraft’s depreciable life, your S corporation faces depreciation recapture, which converts prior deductions into ordinary income.

Tip. Ensure that business use of the aircraft remains above 50 percent.

Cost-Sharing Arrangements

The tax code does not allow S corporations to allocate aircraft expenses based on use by owners. For example, if you and a friend own an S corporation 50/50 but use the aircraft at different rates (e.g., 20 percent versus 80 percent), the corporation cannot allocate expenses accordingly.

Tip. Consider using a partnership structure if you need flexible cost-sharing arrangements.

Choosing the entity structure for aircraft ownership is crucial to maximizing your tax benefits and avoiding unnecessary complications. If you want to discuss your aircraft, please call me on my direct line at 408-778-9651.

Tax

Protect Aircraft Leasing Tax Deductions from IRS Hobby Loss Rule

Here’s important information regarding aircraft leasing and potential tax implications:

1. The IRS has announced increased audit scrutiny of private jet usage, mainly focusing on high-income taxpayers. You can bet this focus will trickle down to most aircraft.

2. There’s a risk that the IRS could classify your aircraft leasing as a hobby. That would tax you on the income but deny all deductions.

3. To protect yourself, consider the following strategies:

  • Conduct your leasing activity in a businesslike manner with proper documentation.
  • Consult with aircraft leasing experts.
  • Structure your leasing activity as a single-member LLC within your existing business.

4. By having your business own an LLC that holds the aircraft and leases it back to the business, you can maintain liability protection while potentially avoiding hobby loss rule challenges.

If you want to discuss your aircraft, please call me on my direct line at 408-778-9651.

Tax

Smart Solutions That Decrease Social Security and Medicare Taxes

Here are some important updates and strategies regarding Social Security and Medicare taxes that may significantly impact your business.

For 2024, the Social Security tax ceiling increased to $168,600, resulting in a maximum Social Security tax of $20,906 for high-earners. The Social Security Administration projects this ceiling to rise annually, reaching $242,700 or more by 2033. Additionally, the government adds a 2.9 percent Medicare tax to all wages and self-employment income, with an extra 0.9% for high-income earners.

If you’re self-employed, these taxes can be particularly burdensome. Here are three strategies that can potentially reduce your tax liability:

  1. Operate as an S corporation. This structure allows the corporation to pay you a reasonable salary and distribute the remaining profits to you, exempt from self-employment taxes.
  2. Leverage community property rules. Married filers living in community property states can use IRS rules to eliminate or create a spouse partnership in order to reduce self-employment taxes.
  3. Avoid the husband-wife partnership classification. With close attention to partnership attributes, you can avoid the husband-wife partnership classification and reduce overall self-employment taxes.

Each of these strategies has specific requirements and potential trade-offs. If you want to discuss the possibilities, please call me on my direct line at 408-778-9651.

Scroll to top