If this is NOT possible, however, and you must place your aircraft in service next year, you are probably still better off than you would have been had you “only” been able to take the 50% bonus. This is because assets placed in service in the fourth quarter of the year do not receive the full first-year depreciation allowance. Your bonus allowance reverts back to 50% for assets placed in service in 2012. By waiting until early next year, you still receive this benefit, but are now able to take the full year MACRS depreciation allowance. In other words, unless the value of your depreciation allowance is considerably greater than it will be next year, you’re better off taking your time and making sure you have done your tax planning carefully, not only at the federal but also at the state – sales tax – level.

September Overview:
o Approaching crunch time for 2012 delivery outlook
• Order activity for the remainder of the year, particularly Q4, will be critical for determining whether next year’s deliveries will meet estimates
• Analysts forecast a 20% increase off the bottom in 2012, but this will require a pickup in demand that has been slow in coming and confined to the larger segment of the market
o Used market trends flipped in August
• Last month saw higher prices and higher inventories, the opposite of what has been observed for most of the year
• The increase in prices is a positive sign and the bump up of used inventories may be a reflection of broader economic weakness, but one data point is not enough to determine that the trends are changing
o Used jet inventories increased by 20 bps
• Inventories for sale as a percentage of the active fleet increased to 10.5% in August
• By category, Heavy (+0.3%), Medium (+0.1%) and Light (+0.2%) jet inventories were all up from the prior month
o Average asking price increased 0.2%
• Average price rose to $10.64MM in August, and is down 6.4% y/y
• Heavy jet prices decreased 0.3%, while Medium and Light jet prices increased 1.1% and 1.6%, respectively

The most updated figures (for flights taken between 7/1/11 -12/31/11):

Period During Which the Flight Is Taken

Up to 500 miles = $.2395 per mile
501-1500 miles = $.1826 per mile
Over 1500 miles = $.1756 per mile

Terminal Charge = $43.79

These charges are calculated for that group of miles and added together, so, for example, a 1000 mile flight will require calculating (500 miles x $0.2395) plus (500 miles x $0.1826). The more you fly, the better the deal (sometimes).

There is also a “terminal charge” that is updated twice a year. For the second half it is $43.79 per SIFL-qualified flight.

(Updated 10/03/2011)
Source: Rev. Rul. 2011-21, 2011-40 IRB 458, 09/30/2011

The taxpayer can use these Guides to his advantage in several ways. Naturally it is always helpful to have your opponent’s playbook before the game. While an auditor might not be bound strictly to the principles in the Guide (it is advisory rather than mandatory), you can point to its guidelines if there are points of disagreement as to what the auditor wants to review or the scope of the audit. Always remember, too, to verify that the years to be examined are not closed (generally tax years more than 3 years absent fraud and with timely filed returns). You can similarly point to the Internal Revenue Manual (I.R.M.) as “persuasive” authority that you are correct on a particular point of tax law.

With that background, the Service has recently updated its guides for audits of Attorneys and Business Consultants. One particular area of interest is in the Attorney guide on the subject of attorney-client privilege. The guide correctly recognizes that an attorney and his or her client have the right to assert this privilege against the IRS. The Service may be able to overcome this privilege in some cases by issuing a summons, if there is evidence of fraud or in criminal matters. The tax attorney must carefully review the information to be produced, however, consistent with his or her ethical obligations to his clients, and insist that the Service strictly adhere to its procedures for issuing summons to acquire protected communications. The Service may not audit an attorney as a fishing expedition for information about the attorney’s clients.

As a tax attorney I often represent other professionals against the IRS and Florida Department of Revenue in federal income tax, and Florida sales tax, use tax and employment tax audits. If you would like more information about defending your legal rights in this area please visit me at http://www.goodattorneysatlaw.com/tax.html.

For the IRS Attorney Audit Technique Guide see http://www.irs.gov/businesses/small/article/0,,id=241098,00.html

Now, no one can argue that a 100% writeoff is a bad deal. In fact, it is nearly unprecedented in that under present law there is no ceiling on the amount that can be depreciated. So, as far as “corporate jets” are concerned, it is certaintly nice to have.

Here’s the problem, though, one of many: Exactly how many “corporate jets” are there relative to the amount of capital equipment that is placed in service every year? The bonus provisions are not a corporate jet anything – they will apply to most new purchases of business equipment, perhaps backhoes, vehicles, manufacturing equipment and so on – perhaps the very equipment needed to provide those “shovel ready” stimulus jobs which never showed up. The issue has been framed purely for political purposes: to create the idea that somewhere in the tax code lies a provision hand-crafted and narrowly tailored to give a huge writeoff to “corporate jet” purchasers at the expense of everyone else.

Second, the bonus provisions apply only where the property to be depreciated is “first used” by the taxpayer – i.e. new. There remains a large inventory of used aircraft of all sizes, jets and otherwise, and prices remain largely flat. In terms of the number of units sold the “corporate jet” loophole is smaller than many believe.

This all, of course, sets aside the real damage, which is to the image of general aviation in general, one of the few remaining bastions of American manufacturing. U.S. aircraft manufacturers, and the people that work for them, face more foreign competition than ever from sleek foreign competitors.

Perhaps it’s obvious to point out that this is not about fairness. Rather, it is about cynically pressing buttons designed to inflame and exaggerate classic us versus them cliches. No issue is one-sided, but a little truth wouldn’t hurt.

While aircraft owners must concern themselves whether the income this generates is “passive”, there is usually less dispute as to whether the leaseback arrangement is a bona fide business arrangement for purposes of taking business related deductions and allowances, like the Section 179 expensing allowance that produces considerable tax savings in the year in which the plane is placed in service.

The Tax Court, in a Memorandum opinion: Tax Practice Mgmt., Inc., et al. v. Commissioner, TC Memo 2010-266, took exception to the taxpayer’s expensing allowance for lack of a profit motive in its leaseback arrangement. The taxpayer was in the tax preparation business and had offices in multiple states. He testified at trial that his intention in purchasing the plane was to facilitate travel to and from his different offices and support his overall business operations. He stated that he never intended for the leaseback activity to produce more than a small amount of income to offset the plane’s costs.

The court looked to the facts and circumstances of this case in upholding Respondent’s argument that the taxpayer lacked the requisite intent. At the time of purchase, Respondent argued, the taxpayer was in the process of selling the business for which he claimed to have purchased the plane. The Court further noted that the taxpayer used the plane only once in the year in which it was placed in service (late in the year), for a test flight.

Most notable about this opinion was the court’s focus on whether the taxpayer intended to make a profit with the airplane rather than with his tax preparation business. This is an unfortunate decision in that many aircraft purchasers have considerable, bona fide business use for their planes as business tools, and not because they are looking to enter the aviation business per se. The court seemed to place undue emphasis on whether the lease to the flight school was sufficient in and of itself to show the requisite profit motive.

Lesson learned? Here’s a few suggestions: (i) If you’re hot to close on your aircraft purchase prior to the end of the year, stop. The court in the opinion above found the taxpayer’s minimal use of the plane in which the expensing allowance was taken persuasive in accepting Respondent’s argument that there was no “profit motive” in buying the plane. Take your deductions in years for which you can establish a track record of using your plane for business; (ii) Establish in advance, preferably in a written business plan, how the aircraft fits into the business’ overall profit motive. Highlight the differences between the larger business of which the plane is a part, versus the ownership and leasing of the plane as a business unto itself. This is a critical distinction that can save you from a result similar to what occurred in Tax Practice Mgmt.

Ari Good, Esq. practices in aviation tax law, including in defending aircraft businesses and owners in federal income tax and state sales and use tax audits. For more information visit our aviation and tax pages.