Michael Kosnitzky is one of the leaders of Pillsbury Winthrop’s Private Wealth practice and advises some of the world’s most well-respected individuals, families, and privately held businesses.
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Mr. Kosnitzky recently explained the ins and outs of private aircraft ownership and how it impacts the ultra-wealthy’s finances.
Haute Lawyer: Why are planes such an interesting acquisition in the context of wealth management?
Michael Kosnitzky: The ultra-wealthy do need to travel and speed, flexibility, confidentiality and safety are all at a premium, making private jet ownership an essential asset of the business of many family offices. Private aircrafts are needed to diligence new investments, provide oversight of existing investments, travel between family office administrative locations and, of course, for personal, non-business travel.
HL: What are three things plane owners do not know when it comes to finances and wealth management?
MK: First, private aircraft owners are often unaware of the highly complex and nuanced federal income tax and state sales and use tax rules involved in aircraft acquisitions and operations. The rules as to how to obtain, maximize and utilize deprecation in the year an aircraft is first placed in service, and avoiding or minimizing sales and use taxes in the year of the purchase and thereafter, are hugely misunderstood, even by tax professionals who do not practice in this specific area. Remember, there are just not that many people who buy brand new Global 7500s or G750s each year, or similarly priced private jets, and even fewer tax professionals who are experienced in this space. Therefore, a lot of tax benefits are left on the table in the year of acquisition.
Second, failure to properly document and plan business flights to maximize deductions that may offset ongoing operating costs are also lost because of a failure to understand the travel expense rules. For example, minimizing commuting and entertainment related flights and clearly identifying and documenting the primary business purpose for a flight in the event of an IRS audit is crucial to maximize business deductions for aircraft operating expenses that are prorated for such business use each year. A failure to properly manage flights after the year of acquisition can also result in a recapture of previously taken depreciation if business usage falls below 50% in any year of the useful life of the aircraft. IRS audits have become routine in this space, and my firm is handling several at this time, so planning and documentation formalities are a necessity.
Finally, while most of my clients do not share or charter their aircraft, some do and understanding the FAA rules as to how much can be charged to third parties and the general regulatory regime is extremely important. You would be surprised how many billionaires feel that its wasteful to underutilize their aircraft and make sure that they satisfy the certification requirements under FAA Part 135 to be able to charter their aircraft to third parties at fair market value. There are other rules under FAA Part 91 that do permit for time sharing an aircraft under limited circumstances, but these rules restrict the amount that can be charged to and paid by the end user. Sometimes clients find themselves at the end of the year and facing income tax recapture, so they require third party usage to avoid an unexpected adverse tax event. So, a knowledge of all of these tax and non-tax rules is important. Our law firm offers one stop shopping for private aircraft owners. Pillsbury is one of the very few law firms that has aviation and FAA lawyers who negotiate aircraft purchases and sales and management contracts, and tax lawyers who handle federal income tax and estate planning for aircraft ownership and operations and sales and use tax minimization planning for aircraft purchases and leases. We also have developed strategies that utilize trusts for confidentiality, anonymity, and asset protection purposes.
HL: For the reasons you have previously mentioned, are planes a smarter purchase than a yacht?
MK: Many of my clients own both of course and some own several aircraft and several yachts. With minor and highly complicated exceptions, yachts are rarely if ever used as a business asset so there are few costs that can be deducted and used to defray operating expenses. Bonus deprecation for the year placed in service is rarely available for yachts. Meeting the trade or business test for a yacht chartering business is difficult and depreciation recapture thereafter could easily occur. Yachts are generally treated as entertainment facilities and have much greater hurdles to overcome to afford tax benefits. No one says, ‘I must get to a business meeting in Miami so let’s jump on the Feadship!’ I can’t say what’s smarter, but I can say that there are more ways to optimize tax benefits when one owns a plane than a yacht.
HL: What is another acquisition which would benefit wealth management similarly?
MK: Perhaps art collections and converting some or all of the collection to an art dealership to be in the trade or business of selling art. This is a longer discussion for another day.
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