Aircraft are never a small purchase, and the price tag gets very big, very fast. Like any big purchase, you need to be smart about the process from start to finish. That means assembling the right team of experts to help you through every step of the way.
Thomas A. Alston, the CEO & Founder of Aero & Marine Tax Professionals, sat down with Kevin Austin, the founding attorney of Aero Law Group, to get his tips on making smart aircraft purchases.
*As a note, the ideas and tips mentioned in this article are general insights based on experience, and in no way, constitute legal advice.
There are seven distinct set of rules to follow before purchasing your next aircraft.
1. Plan ahead
Assemble a good team. The team leader is their buyer’s representative or broker. They’ll help the client figure out if they really need an aircraft and whether they should be chartering, fractioning, or buying a whole aircraft. They’ll also help figure out the kind of aircraft needed. They know the value of aircraft, and know how to tell if a plane is technically sound.
2. Work with a good broker or buyer’s rep
If you don’t have a trusting relationship with an experienced broker Call tom and he will refer you to one.
3. Get a tax accountant involved.
There are all kinds of taxes that an aircraft is subject to, but the greatest potential to adversely affect you is your potential IRS obligations when you are making business use of your aircraft. A very small percentage of CPA’s have expertise in IRS or state tax work regarding income taxes.
4. Hire attorneys who are experts at aircraft purchases.
Aviation law is a very precise area of experience. So much so that many attorneys work only in this area. If you don’t have an existing relationship with one, CALL TOM He will refer you to one.
5. Always use a sales and use tax specialist.
Sales Tax laws are different in every state. This means there are around 50 different sets of tax rules. Make sure you find a sales tax specialist that had experience in the industry.
6. Never try to save money by doing taxes or accounting yourself.
Aircraft purchases are large expenditures. They are also highly prone to income tax audits as well as sales tax audits. Unless you are an experienced tax professional then you are probably qualified. However, rule number one in this case is “only a fool represents himself”.
The following is the interview that we had with Kevin Austin, CA aircraft tax attorney:
Aero & Marine Tax Professionals: Who are the important players in aircraft purchases?
Kevin Austin: The first thing we tell any client is to assemble a good team. The team leader is their buyer’s representative or broker. They’ll help the client figure out if they really need an aircraft and whether they should be chartering, fractioning, or buying a whole aircraft. They’ll also help figure out the kind of aircraft needed. They know the value of aircraft and know how to tell if a plane is technically sound.
From there, a client needs to get a tax accountant involved, whether it’s a company or an individual. They also need to have an attorney that really knows aviation, ideally one that specializes in it, like Aero Law Group. It’s more specialized than you’d think, and there are really only a dozen or so on the West Coast.
The final piece is a specialist in sales and use tax for the client’s jurisdiction. For example, if they’re in California, they should use a team like you guys, Aero & Marine Tax Professionals.
A&M: What pitfalls can this team help them avoid?
KA: Our clients are really successful people, and getting that successful means taking risks. But an aircraft isn’t an investment, and there’s absolutely no reason to take a risk when purchasing one. After all, the best-case scenario is that they get what they paid for it in the end.
That being said, there are four major areas where a client can lose serious money:
1)Failing to plan enough. 2) Failing to focus on the exact type of aircraft they want to buy. 3) Failing to plan for sales and use taxes. This can be 10% of the purchase price in states like Washington or California, which adds up quickly. 4) Failing to perform due diligence on the aircraft, its title, and its seller. We try to dissuade our clients from buying a foreign aircraft or an aircraft with any kind of cloudiness on the title. We also encourage them to only buy from a credible or credit-worthy source.
A&M: Is there any legal way to avoid sales tax?
KA: It really depends on the state where the aircraft will be based. The best state to legally avoid CA sales and use tax? California, hands down. There are many exemptions and legal ways to avoid it there, which is why having a tax expert like yourselves, Aero & Marine Tax Professionals, is so important.
A&M: What are a few things that a client should never do?
KA: You should never take delivery of any aircraft inside California. Also, if you can, avoid bringing your aircraft into Washington. We’ve got the fiercest taxes on the face of the earth, along with Illinois. Oh, and never set up a PO box in Oregon and pretend to live there.
A&M: What about Nevada? Could someone just buy a plane in Nevada and fly or drive it over the border?
KA: They could, but many people don’t realize that there’s actually a steep tax in Nevada as well. Nevada has sales and use tax roughly equivalent to California, but doesn’t have the exemptions that California has.
It’s kind of funny because when you go to the website for Nevada, they talk about how tax-friendly they are with no income tax or estate tax. But when you turn to page two, they talk about sales tax, use tax, and property tax. Their property tax is actually worse than California, and there’s a property tax for many airplanes.
A&M: Can someone buy an aircraft based in California, then move it out of the state and not pay sales tax?
KA: There is an exemption for that if you never, ever want to bring your airplane back to California. But, the truth is, in my experience, that every airplane comes back to California some time. I don’t care whose airplane it is, every one seems to make it back to California almost every year.
A&M: Are there any common mistakes that a DIY’er or CPA might make when accounting for planes?
KA: There are hundreds, really, but the most common one is trying to do things themselves in the first place. It’s a case where a specialist is really needed. After all, this is a high value item. Just filling the gas tank costs thousands and thousands of dollars. So why scrimp and save on the management and administration of legal issues?
A&M: Are you aware of any proposed reforms to the California tax code that might change this?
KA: I’m not aware of anything current. Every couple of years there’s some saber-rattling by a legislator in California, but nothing happens. California has always maintained a very strong exemption structure, and it’s a very favorable place to own aircraft.
A&M: Any final words of wisdom?
KA:
• Hire the right people.
• Always plan ahead.
• And stay away from foreign airplanes.
Oh, and if a client is buying in California or has any kind of relationship with California, we advise them to use Aero & Marine Tax Professionals and have for several decades now. That’s true whether they’re a resident or if there’s any way the aircraft might spend ten percent or more of its time in California contact Tom Alston, Founder and CEO of Aero & Marine Tax Professionals.
Aero & Marine Tax Professionals is here to provide California aviation tax help. We want to help you legally avoid CA sales and use tax! Contact us today for you free 30-minute tax liability consultation.