Tax

You may own an S corporation with a rental property as its sole asset.

A common concern with this approach is what happens when the owner passes away, specifically regarding the step-up in basis.

I’m pleased to inform you that while technically the rental property itself doesn’t receive a step-up in basis upon your death, your heirs will achieve the same outcome. Here’s why:

• Your heirs inherit the S corporation stock at its stepped-up fair market value.
• When the S corporation sells the rental property, it recognizes a gain.
• The gain on the rental property increases your heirs’ basis in the S corporation stock.
• Upon liquidation of the S corporation, your heirs recognize a capital loss that offsets the earlier gain.

The result is that your heirs can potentially sell the property without incurring any tax liability, effectively achieving the same outcome as they would with a traditional rental property basis step-up.

If you’d like to discuss how this might apply to your situation, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 30, 2024

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.

• By Leon Clinton
• August 27, 2024

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.

• By Leon Clinton
• August 22, 2024