By 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.