SEPTEMBER / OCTOBER 2018
Deduction Reduction Taxing BizAv entertainment costs
A Brand New (Virtual) World Using VR to train and maintain TRIGGERS FOR CHANGE AIRBORNE DATA DEFENSE YOUR ASSET ON THE LINE TAXING LEASES WHERE’S THE FLYTE SWATTER? A Business Aviation Media, Inc. Publication
W W W . B I Z AVA D V I S O R . C O M
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10
6
F E AT U R E S
Deduction Reduction 06 Taxing BizAv entertainment costs
• Volume 5 / I s sue 5
by AL AN GOLDS TE IN , C PA
A Brand New (Virtual) World 08 Using VR to train and maintain
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14
Your Asset on the Line
by DAVI D NOR TON
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Taxing Leases
by N E L S TUBB S
17
Customizing your charter management contract
When the FAA and IRS do not agree
by BA A S TAFF R E P OR T
10
Triggers for Change
The flight of independent flight departments
Publisher’s Message 05 Tinder is the Night
by THO M A S CONN E LLY
by G IL WOLIN
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Airborne Data Defense New focus on cybersecurity
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Washington Report
by R I C H PILO C K
by DAVI D COLLOG AN
D E PA R T M E N T S
Where’s the Flyte Swatter?
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S e p t e m b e r/O c to b e r 2 018 B U S I N E S S AV I AT I O N A DV I S O R 3
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PUBLISHER’S MESSAGE ■ PUBLISHER Gil Wolin gwolin@bizavadvisor.com CRE ATIVE DIRECTOR Raymond F. Ringston rringston@bizavadvisor.com MANAGING EDITOR G.R. Shapiro gshapiro@bizavadvisor.com ASSISTANT EDITOR Michael B. Murphy mmurphy@bizavadvisor.com WASHINGTON EDITOR David Collogan dlcollogan@gmail.com CONTRIBUTORS Thomas Connelly Gama Aviation Signature marketing.us@gamaaviation.com Alan Goldstein, CPA Flight Department Solutions agoldstein@flightdeptsolutions.com David Norton Shackelford, Bowen, McKinley & Norton, LLP dnorton@shackelfordlaw.net Rich Pilock SmartSky Networks rich.pilock@smartskynetworks.com Nel Stubbs Conklin & de Decker nel@conklindd.com BUSINESS MANAGER JoAnn O’Keefe jokeefe@bizavadvisor.com BUSINESS AVIATION MEDIA , INC . PO Box 5512 • Wayland, MA 01778 Tel: (800) 655-8496 • Fax: (508) 499-2172 info@bizavadvisor.com www.bizavadvisor.com Editorial contributions should be addressed to: Business Aviation Advisor, PO Box 5512, Wayland, MA 01778, and must be accompanied by return postage. Publisher assumes no responsibility for safety of artwork, photographs, or manuscripts. Permissions: Material in this publication may not be reproduced, stored in a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise) without the prior written permission of the publisher.
Tinder is the Night
The chartered aircraft had just begun its final approach on its last flight of the day. The autopilot was engaged; the landing gear showed “three in the green” – panel lights indicating that they were down and locked. The aircraft seemed ready, but the middle-aged captain hadn’t heard his young first officer speak the proper cockpit callouts verifying that these last steps were complete before touchdown. That was curious, as the callouts are Standard Operating Procedure. When the captain turned from the instruments to inquire, he saw the first officer’s head down, focused on his smartphone. “What the @#!% do you think you’re doing?!” “Tinder,” he replied calmly, and continued his efforts to identify and confirm a date for the evening. No, this is not a set up for another aviation disaster flick. This really happened. And it underscores the risks you take when you dip your toe in the illegal (“grey”) charter market. Arranging a hook-up instead of focusing on getting the aircraft and its passengers safely on the ground may be due to a pilot’s overdependence on computers to fly the aircraft – or to very poor judgement. Either way, this pilot took a foolish risk. Chances are, the aircraft owner was not on board this flight, and this wasn’t his regular pilot. That’s because when business aircraft flight and sales activity dropped during the 2008-2010 economic recession, owner flying did too. So did their direct operating costs (fuel, maintenance, etc.). But owners’ fixed operating costs (hangar, flight crew/ technicians, insurance, etc.) did not. As a result, there were an enormous number of underutilized FAR Part 91 privately operated business jets that owners made available for hire. And, thanks to the ever-increasing efficiency of the internet, there now are an enormous number of new and inexperienced online jet charter brokers. Since there still is no government license or certificate required to broker aircraft charters, these “faceless app” brokers set up shop without certification, and without complying with commercial aviation operating regulations. Those regulations are designed to ensure the safety of, and manage the travel risk for, you, your aircraft, and the charterer. So don’t take a chance. When you charter, while you might find a “real deal” on a shady broker site, you could wind up flying with a pilot looking for a similar “deal” on Tinder. Business Aviation Advisor is committed to helping the National Air Transportation Association and other industry groups inform you about the very real safety and tax fraud risks of the grey market. You’ll find the details on how to avoid those risks in our special online report: “Fifteen Shades of Grey Aircraft Charter.” Thanks for reading!
The views and opinions expressed in Business Aviation Advisor are those of the authors and advertisers, and do not necessarily reflect the policy or position of Business Aviation Media, Inc. Articles presented in this publication are for general information and educational purposes and do not constitute legal or financial advice. Postmaster: Please send address changes to: Business Aviation Media, Inc., PO Box 5512 • Wayland, MA 01778, USA ©Copyright 2018 by Business Aviation Media, Inc. All rights reserved
Gil Wolin — Publisher gwolin@bizavadvisor.com
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■ AIRCRAFT FINANCE
Deduction Reduction BY ALAN GOLDSTEIN, CPA Flight Department Solutions / agoldstein@flightdeptsolutions.com
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he Tax Cuts and Jobs Act (TCJA), enacted on December 22, 2017, contained a number of great Christmas gifts for business aircraft owners and users in its more than 400 pages (See “Capitalizing On The TCJA,” BAA May/June 2018). Some of the well-publicized positives of the TCJA include lower income tax rates for both individuals and corporations, as well as the expansion of 100% Bonus Depreciation expensing. This favorable depreciation change, fully extended through December, 2023, now is also available to used aircraft. But to pay for these goodies, the TCJA includes a number of “Scrooge” provisions. One of the most far reaching of these is the new rule eliminating the tax deductibility of all entertainment, amusement, or recreation expenses, even if such expenses are directly related to business activity. Business aircraft now are treated like a country club membership or an athletic event sky box. The IRS definition 6 B U S I N E S S AV I AT I O N A DV I S O R
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of “entertainment” includes travel to and attending sporting events, including participating in activities such as fishing, golfing, hunting, and skiing. The presence of a business activity or rationale is not taken into account. Under the TCJA, when a business aircraft is used to travel for entertainment purposes, the operating expenses which are disallowed as a tax deduction include all of the variable costs (Direct Operating Costs, or DOCs) incurred to make the trip possible. Variable expenses include the amounts expended for fuel, maintenance, catering, and trip expenses of the crew and aircraft (handling, airport fees, navigation charges, communications, etc.). In addition, non-deductible expenses related to entertainment trips include fixed costs associated with the aircraft operation. These fixed costs include expenditures for crew salaries, insurance, hangar rent, aircraft lease/interest payments, and tax depreciation. These new entertainment rules now treat this usage just as unfavorably as trips taken for personal purposes. The eliminations of these expenses as tax deductions will w w w. B i z AvA d v i s o r. c o m
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Taxing BizAv Entertainment Costs
Vigilance in keeping accurate and timely records will pay off dramatically increase the net after-tax cost of operations for companies that use their aircraft for entertainment purposes. For example, a mid-size jet flew a total of 400 hours this year. The aircraft was used heavily (80 hours, or 20%) for client entertainment use, and has DOCs averaging $2,500 per hour. Variable expenses thus total $1 million this year. In addition, fixed costs, including tax depreciation, added another $2 million, so the total annual expense to operate the aircraft was $3 million. The amount of expenses that no longer are tax deductible equals $600,000 ($3 million x 20%). So, at the new reduced corporate tax rate of 21%, the company’s U.S. Federal income taxes will be increased by $126,000 ($600,000 x 21%). And the company’s state income taxes also are likely to be higher. Under the old entertainment rules, the company could have flown an additional 50 hours per year ($126,000 / $2,500) at no additional cost. What is not yet clear is how trips with multiple purposes (a combination of business and personal or business and entertainment) will be treated.
What Do These Changes Mean for You?
With the new tax regulations in place and previously allowed tax deductions at risk, you will need to be even more vigilant in keeping accurate and timely records to substantiate and document the use of your aircraft. Why is this so? Keeping good records will be especially helpful if, at a much later date, a government entity such as the IRS or FAA knocks on your door with questions on aircraft usage. In years past, it might have been acceptable to maintain records that informed the questioning agency: “Seven souls on board for a business trip.” Going forward, you will be better served to record each passenger onboard the airplane on a leg-by-leg basis, along with the exact purpose of their trip. Like many executives, you may have access to and use of the company aircraft for personal or non-company business travel as part of your compensation package. Keeping detailed records is critical in calculating any additional taxable income that needs to be allocated to you, other executives, and/or your board members. Records also help allocate deductible costs among the various departments which have access to the aircraft, so that each is properly charged for their use. Business uses may include, for example, executive travel to suppliers or vendors, sales tours among key clients (not client entertainment; travel to and from locations to optimize use of executive time instead of using inconvenient commercial airlines), attending other industry or business related functions and events. w w w. B i z AvA d v i s o r. c o m
If yours is a publically traded company, it must follow strict Securities and Exchange Commission (SEC) reporting rules. These include reporting officer compensation for the CEO, CFO, and the three next most senior corporate executives regarding their use of the corporate jet. If the reporting is not done correctly, not only can the SEC pursue your company and assess substantial monetary fines, you also run the risk of damaging your company’s reputation. If your company does not already have such a document place, strongly consider creating and implementing a Business Aircraft Utilization Policy. This Policy should detail who has access to the aircraft and when, as well as what types of trips can be taken. To assist with documentation, you can use a “trip sheet” to record the specifics of the flight including date, time, and destination, purpose of the trip, and listing of the passengers, along with their affiliations. You may delegate to a crew member the responsibility of checking off that the listed passengers are indeed on board and that a use purpose has been provided for each. The “purpose of the trip” section should provide details as to when the aircraft is used for Business, Business Entertainment, or for Non-Business (Personal Use) purposes. “Personal Use” should provide further details, such as if the trip is for a vacation, entertainment use equivalent, or a non-entertainment use like commuting, education, attending a funeral, a health or medical appointment, attending a charitable event, or traveling to an outside meeting. How your company handles and documents these examples of non-entertainment personal use trips will determine whether or not they may be partially deductible or completely non-deductible. In summary, the after-tax cost of using your aircraft for entertainment purposes has gone up quite a bit. However, good recordkeeping can both defend and maximize the deduction of some trip-related costs. Since this area of the new tax law can be very complicated, it’s always best to seek the advice of competent professionals to assist you. BAA AL AN GOLDSTEIN , CPA , is a Special Advisor to Flight
Department Solutions. With 30+ years of flight department management expertise, he holds an MBA in Taxation and is a past Chairman of the NBAA Tax Committee.
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■ AIRCRAFT MAINTENANCE
A Brand New (Virtual) World Using VR to Train and Maintain our whole executive team is stuck in a remote location – an unscheduled maintenance problem has grounded your aircraft. Your options? Get a ferry permit to move your aircraft to the nearest authorized maintenance facility, or, if it’s not able to fly, call in a remote maintenance team. Either way, it’s time you’re not flying, and not building your business. Soon, there will be a third alternative: remote maintenance diagnosis via Virtual and Augmented Reality (VR and AR), which will enable skilled technicians to troubleshoot and supervise aircraft repair from afar. Using VR and AR technology, he or she can don a headset to inspect and manipulate aircraft parts and subassemblies without ever touching the aircraft (See “Your Beautiful Time Machine,” BAA May/June 2017). These skills will become part of the training curriculum for the next generation of aircraft technicians. And the need for training is crucial today, since the flight crew personnel shortage also applies to highly skilled and experienced technicians. While aging technicians are retiring, aging aircraft are not. Dassault Aviation recognized that need in 2016. A team of Dassault engineers, headed by Igor Fain, spent the last three years developing a new tool: Falcon Immersive Practical Training. “Others use ‘virtual’ training, but most of the time it’s simply 3D mockups on a regular screen,” says Fain. “Our tool is the first to use VR headsets for training, and the first capable of allowing so many people (one instructor and up to ten trainees) to work together in the same virtual world at the same time. There’s literally nothing else like it.” The only tool of its kind, it is the first to use VR headsets for training. It also is the first program capable of allowing multiple technicians to gather in a computer-generated aircraft maintenance bay to train with an instructor, while they actually sit comfortably in padded chairs in a typical classroom setting. 8 B U S I N E S S AV I AT I O N A DV I S O R
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Adapting Technologies to Current Needs
The VR tool was conceived by Dassault’s Patrice Kurdijian, Director, Service Center Network & Maintenance Training, who was looking for a way to improve training content and make it more practical. He’d noticed the advancements being made in virtual reality technologies and imagined combining them with Dassault’s Computer-Aided Three-dimensional Interactive Application (CATIA) 3D data. Dassault now holds a patent for the techniques used to merge data from several different sensors (the headset and the infrared cameras) across multiple users, and to seamlessly display the result in a single coherent virtual world. The system enables trainees to meet together with their instructor in a full CATIA digital mockup of the same virtual aircraft. It uses high tech VR headsets and sensors to allow the trainees and the instructor to see each other in the virtual world, together with their gestures and movements. Up to eleven people can be in the same location in the virtual world, including in the mechanical bay, in a fuel tank, or under a cockpit floor – a scenario not practical in the real world. In addition to accessing difficult to reach locations, instructors can perform precise hand movements to better illustrate how to remove or install a component, and can supplement this demonstration with real, 360° photos that match the 3D mockup. Students can also virtually “see” areas of the aircraft that otherwise would be very difficult, time consuming, or even impossible to access. Using the CATIA data, an instructor can reveal the aircraft in layers, removing panels, showing the entire electrical or hydraulic system — all color-coded for easy identification. Technicians trained using Virtual Reality soon will be available to help you have virtually uninterrupted use of your business aircraft to maintain face-to-face personal contact with your clients, customers, and business associates. It’s a brand new way to experience your aircraft. BAA w w w. B i z AvA d v i s o r. c o m
DAS SAULT AVIATION
Y
BAA STAFF REPORT
It’s not just a place to land.
Visit signatureflight.com or call +1 888 367 0673 Private Aviation Terminals | Fixed Base Operations | Aircraft & Engine Maintenance | Aircraft Charter | Aircraft Management
■ INDUSTRY UPDATE
Triggers for Change The Flight of Independent Flight Departments BY THOMAS CONNELLY
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Gama Aviation Signature / marketing.us@gamaaviation.com
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change, those opting for a management company may do so for other reasons: ■■ More time for senior management to focus on your company’s core competency and lines of business. ■■ Mitigating risk management – In the unfortunate case of incident or accident, the insurance company – and the press – will be looking closely at you. If your aircraft is managed by an independent company, it’s their name in the news, not yours. ■■ Access to a pool of supplemental aircraft operated to identical safety standards. Your aircraft may be appropriate for 80% of your travel. Chartering a smaller – or larger – aircraft to handle the balance can be easier when it’s managed by the same company that manages yours. ■■ Relieving your pilots and maintenance technicians of the need to supervise SMS, flight and ground operations, and logistics. A management company handles the administrative work, leaving your crew to do what they do best. ■■ You always have lift – When your crew is out for training, or your aircraft out for maintenance, a replacement is always available. Flight departments wanting to remain independent can draw upon available industry resources (e.g. NBAA and flight-planning services), and can hire an independent consultant or management company for an impartial audit of their operations and spending. However you choose to manage your aircraft, a periodic review of your current operations is always in order. BAA THOMAS CONNELLY is President and CEO of Gama
Aviation Signature. With 40 years in aviation, he is an NBAA Certified Aviation Manager, and holds Airframe and Powerplant licenses as well as a private pilot certificate.
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hile the first business jet management company was founded in 1967, not until the economic crisis of the mid-1970s did the financial advantages of pooled aircraft begin to drive the growth of this industry segment. Today’s trend is another shift: from independent flight department to other options, including aircraft management companies. While some independent operators still prefer the perceived greater privacy, physical security, and control (i.e. “no one else has access to my aircraft, and I know where my aircraft is at all times”), others cite several reasons for change: ■■ Need for revenue – Although the economy appears to be recovering, there’s a “lag effect” from the past several years when aircraft were underutilized. Many owners are moving their aircraft to management to generate some revenue from charter. ■■ Accountability – There’s a shift away from aircraft ownership by publically traded companies. Using alternative lift, the CFO can honestly answer, “No” to the shareholder who asks: “Are you wasting my money by owning a jet?” ■■ Regulatory pressures – Staying abreast of new mandates and increasingly complex regulations may be a challenge for a small operation. ■■ The continuing pilot shortage – Corporate flight departments are the unwilling targets of poaching by the airlines, which offer more stable schedules and often, better benefits. (see “Sudden Dearth” BAA July/August 2018). These quality-of-life issues are increasingly important to the next generation of pilots, even more so than higher salaries. Unwilling to undertake the challenges of replacing retiring or “raided” pilots, more operators are looking to independent aircraft management companies to do so for them. ■■ A change in aircraft or travel profile – Flying more overseas? The purchase of a long-range, large-cabin aircraft to handle international travel may require a change in operational structure to handle increased staffing, regulations, and more complex flight logistics (overflight permits, customs arrangements, etc.). ■■ A culture change – Whether a turnover in the executive ranks, a company location move, or a switch from private to public ownership or vice versa, change can inform the need to revisit how company aircraft are managed. ■■ More viable alternatives – Now, with the proliferation of alternative lift options, including charter, executive travel is not tied to ownership. In particular, younger customers are quite willing to share. (See “The ‘Access Economy’” BAA May/June 2018). While seeking lower operating costs – via savings on fuel purchases, pilot training, and crew expenses – often is a driver for
■ CABIN OPERATIONS
Airborne Data Defense New Focus on Cybersecurity
BY RICH PILOCK
O
SmartSky Networks / rich.pilock@smartskynetworks.com
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employed by all airborne service providers. Those products can require high speed bidirectional bandwith, with data going both to and from the aircraft. What Technology Poses Additional Risks for Operators? Modern avionics with wireless systems updates or flight plan uploading capabilities are potentially vulnerable, as are all parts of the Internet of Things. While the weak security links may vary from system to system, your approach should not. Work with providers who take a holistic approach to security for both airborne and ground networks. Are there proprietary methods for signal transmission which are less likely to be compromised? Older-generation equipment also is susceptible to attacks. Similar to systems on the ground, older radios have default settings and passwords incorporated. Hundreds of aviation mechanics know these administration passwords, which makes accessing these devices relatively easy. What Other Steps Should You Take? Much of the best cybersecurity advice on the ground applies to threats in the air as well. Work with your company’s information technology team to employ best practices specific to your own systems. Undergoing better corporate security training adds to your protection. Staying alert to and being aware of the potential for threats are your best defense. Always assume your data and information are potential targets for attack: whether in the coffee shop down the street or at 40,000 feet in the air. Preparation always is a less painful path than the consequences of inaction. BAA RICH PILOCK is Director, Support and Delivery at SmartSky
Networks, which is launching a 4G LTE-based, air-to-ground network for inflight connectivity. Much of his 20 years’ IT and data protection experience is with aviation networks.
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ur connected world now reaches through the sky to our modern aircraft. The expectations of wireless internet service and real-time voice and data communication in the air are fast becoming comparable to what we take for granted for our offices and homes on the ground. The new technological skyscape offers us great advantages and conveniences. But it’s not without risk. Fortunately, conversations about information protection generated by the European Union’s move to implement General Data Protection Regulation (GDPR) and news stories about security breaches help bring greater awareness to potential problems. How Should Operators Address Inflight Internet Security? As a business aircraft operator, you need to take steps to understand the limits of security features and limitations by each service provider. Accountability is a responsibility shared by both parties. Neither can solve the problem independently, and there’s no onesize-fits-all solution. Providers should realize that the vast majority of operators aren’t security experts. Their core competencies lie elsewhere. Operators are, however, responsible for adopting technology and processes that provide the needed expertise and security to match their requirements. Staying up-to-date on the current cybersecurity landscape is integral to your business operation. Continual training and cyber assessments of flight departments should be held at least annually. Service providers that offer a comprehensive security package can help flight departments navigate the nuances of cybersecurity requirements. Expect your service provider to take steps to act as an adviser on the best approach and offer services that comprehensively address challenges and regulations. This relationship should be ongoing and revisited frequently. Security is not a simple “set-it-and-forgetit” approach. What works in 2018 may need adjustments in 2020. What Should You Look for In Service Providers? Seek out providers who are at the forefront of innovation. Are providers working with decades-old technology with widely known vulnerabilities? Have they introduced proper security measures, such as engaging software developers through a framework that includes security services? Do providers use third-party security services to validate the security of their systems? Network speed or capacity can significantly inhibit the effectiveness of some security controls. Many security and privacy products are highly dependent on the consistent, low-latency, high-speed connection that’s typical on the ground, but is not
EMBRAER: A VERY UNIQUE COMBINATION OF PERFORMANCE AND RELIABILITY “The Legacy 500 provides a unique combination of performance, comfort and reliability. These jets deliver a great value for customers we fly. I think very few manufacturers are able to combine all of the critical components of what makes a great aircraft, and Embraer certainly does that through innovations such as fly-by-wire technology. Embraer’s team has been incredibly responsive to ensure that we get our airplanes up and flying for our customers. I would tell you Embraer’s craftsmanship and passion have come through in the products the company makes for us, and we, in turn, build on that passion when operating those planes and flying them for our mutual customers. We share Embraer’s passion for taking care of our flying customers.” - Michael Silvestro, CEO, Flexjet Watch Mike’s story and request more information at EmbraerExecutiveJets.com/Mike
The game-changing Legacy 500, with its exclusive full fly-by-wire controls – previously available only in modern airliners and much larger business jets – is the benchmark for the future in performance, comfort and passenger experience. On the flight deck, the advanced Rockwell Collins Pro Line Fusion™ platform puts pilots in complete control in a cockpit environment that provides superior ergonomics. With seating for up to 12 passengers, the Legacy 500 features a spacious stand-up cabin with a flat floor, fully equipped galley, state-of-the-art in-flight entertainment system, elegant seating that converts into fully flat berths and the lowest cabin altitude of any medium-cabin aircraft. Its extensive main baggage compartment is complemented by a generous in-flight-accessible cabin stowage space. Boasting enviable speed, the clean-sheet design Legacy 500 delivers a high-speed cruise of Mach 0.82 and excellent runway performance.
■ AIRCRAFT MANAGEMENT
Your Asset on the Line Customizing Your Charter Management Contract BY DAVID NORTON Shackelford, Bowen, McKinley & Norton, LLP dnorton@shackelfordlaw.net
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• Into a weather-challenged zone, such as a hurricane area, forest fires, or after a recent blizzard • To a country that imposes tariffs that you might end up having to pay after the fact. ■■ Specific items you may not want on board, such as: • Animals, whether caged pets or exotic species • Firearms • Other materials you might find objectionable. ■■ Additional safety items or restrictions, such as: • Requiring the pilots to be trained by a particular training company • Imposing crew duty requirements more stringent than the FAA’s • Requiring every flight to have a corporate flight attendant (See “The Corporate Flight Attendant: Safety and Service,” BAA April 2014). ■■ Any timing limitations on use of your aircraft, such as: • The requirement to provide at least 48 hours’ notice before a charter so that you can make sure it won’t conflict with your planned use • No weekday charter (if you use your airplane primarily for business during the week), or conversely • No holiday weekend charter (if your use is primarily personal). All of these suggestions are subject to some very important restrictions. The Department of Transportation’s anti-discrimination rules make it very clear that you cannot seek to limit the use of the aircraft based on race or gender, for example. And the FAA has significant rules regarding placing so many restrictions or guidelines on the charter management company that you have, in effect, failed to give them the operational control of the aircraft they are required to maintain. But it is your aircraft, so discuss with the charter management company just how it will – or will not – use your aircraft. BAA DAVID NORTON , MBA , JD, ATP, a graduate of the
USAF Academy, heads the aviation law practice at Shackelford, Bowen, McKinley & Norton, LLP, and is an internationally recognized aviation lawyer and an active pilot.
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hen seeking to generate extra revenue to help offset the overhead costs of owning and operating your aircraft, you’ll likely hire a properly licensed aircraft charter management company (a “certificated air carrier” in FAA-speak) with the authority to make it available to the public for charter flights. Normally, you would set up a “dry” lease (a.k.a. “charter management contract”) to that charter operator. While the FAA will impose some restrictions on what such a contract can require, it is your aircraft, so you may seek to impose some guidelines that most charter operators won’t necessarily initially offer to help protect your valuable asset. Any good charter management contract will have standard clauses dealing with the term and termination rights of the parties, the services the charter operator will provide (crew, maintenance, record keeping, etc.), the basic obligations of the airplane owner to pay for the maintenance of operations of the aircraft (in exchange for receiving most, if not all, of the generated charter revenue), insurance requirements and related indemnification and risk-of-loss issues, key legal provisions such as statements addressing the FAA’s rules on “operational control” of the aircraft, and common “boilerplate” provisions dealing with notice requirements, confidentiality, and so forth. What else might you consider asking for that does not typically appear in the first draft of a charter management contract? Examples of such provisions include: ■■ Limitations on who can charter the aircraft, such as: • “Hard partiers” (e.g. rock bands) • Young children • Customers who refuse to submit to credit checks. ■■ Limitations on substances you might not want on your aircraft: • Red wine (See “Something to Hide” BAA Nov/Dec 2016) • Marijuana, even if legal under your state law • Smoking of any kind. ■■ Beyond what is typically covered under aircraft insurance provisions, areas where you may not want your aircraft to be operated, such as: • Any region on the U.S. State Department’s Travel Advisory list, or even outside your country at all
KNOW MORE. Flight Analysis by Owner/Operator, Aircraft, Fleet, and Airport
UTILIZATION REPORT:
Owner: Don Fay, 540-765Chief Pilot: Tim Lowe, 757-200Operator: EZ Fly, 276-336GULFSTREAM 550 REG #: N107MF
Based: IAD/KIAD Fuel Burn: 72,535 gallons US Flights: 164 Tech Fuel Stops: KFAR/KGRI #1 Airport Pair: KBAF/ KIAD European Flights: 12 Tech Fuel Stops: CYQX/EGPK/CYYT #1 Airport Pair: LIRA/LFPB Notes: Only drinks Espresso
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AIRCRAFT OPERATIONS ■
Taxing Leases When the FAA and IRS Do Not Agree BY NEL STUBBS he recent spotlight on illegal charter and who has operational control of an aircraft is generating new interest in leases: not finance leases, but “wet” and “dry” aircraft operating leases. The FAA defines a “wet” lease as “any leasing arrangement whereby a person agrees to provide an entire aircraft and at least one crewmember.” Leasing an aircraft without the crew normally is a “dry” lease, and the lessee has operational control of the aircraft. With a “wet” lease, the lessor retains operational control. The IRS imposes the commercial Federal Excise Tax (FET) on wet leases, and the noncommercial Federal fuel tax on dry leases. But the distinction is not simple. While passing the test for FAR Part 91 (owner use only), a wet lease operation might be considered a commercial activity (Part 135) for FET purposes. The most common non-financial leasing arrangements and their tax ramifications are:
Wet Leases
Charter – Conducted under FAR Part 135, the operator must hold a commercial operating certificate. Charter is always considered a wet lease, as the aircraft is provided with crew. “Commercial” for both FAA and IRS purposes, the FET is due, less catering, flight phones, ground transportation, etc., listed separately on the invoice. A credit or refund is allowed for tax paid on the fuel for that flight. Timesharing – FAR Part 91.501 permits timesharing, a form of wet lease, which allows the owner to provide the aircraft and crew to a lessee, and charge up to twice the direct operating costs for any flights. The IRS considers this a commercial activity, and the FET is due on the amounts paid and a credit or refund is allowed for the tax paid on the fuel consumed during the trip(s). Interchange – When “… a person leases his airplane to another person in exchange for equal time, when needed, on the other person’s airplane and no charge, assessment or fee is made, except that a charge may be made not to exceed the difference between the cost of owning, operating and maintaining the two airplanes,” it also is a wet lease, as the aircraft and crew of one company is exchanged for another’s aircraft and crew. So for FET purposes, it’s a commercial operation, and tax is due on the fair market value of any difference between the operating costs of the two aircraft. Again, a credit or refund is allowed for the tax paid on fuel. Two fair market values must be considered: the IRS’ and yours. w w w. B i z AvA d v i s o r. c o m
Dry Leases
A “True” Dry Lease offers the aircraft without crew. Typically, the lessee hires the crew and has operational control of the aircraft. The lease is considered noncommercial, and neither lessee nor lessor are required to hold an FAA-issued charter operator’s certificate, as long as the lessee does not carry persons or property for compensation or hire. The IRS and FAA agree that no FET is due on dry lease payments. A “Sham” Dry Lease (or “Damp” Lease) may be a purposeful attempt to confuse the issue of who has control of the aircraft. Typically, the lessor provides the aircraft under a dry lease and also provides the crew under a separate agreement. Or, the lessor leases the aircraft, but you as lessee must get your crew from the lessor or a lessor-specified source. In each case, the aircraft and the crew are too closely connected, and the FAA may determine that the lessor should hold a commercial operating certificate. The IRS likely would consider the lessor to have “possession, command and control,” and the lessee would owe FET on the lease and pilot service payments. It’s in everyone’s best interest to understand what type of lease arrangement you are entering. Don’t be caught unaware by either the FAA or the IRS. BAA NEL STUBBS, VP Conklin & de Decker, a JSSI company, has
been advising aircraft owners and companies on aviation tax issues for 30 years. She holds a BS in Mathematics and a MS in Aeronautical Science.
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Conklin & de Decker / nel@conklindd.com
■ WASHINGTON REPORT
Where’s the Flyte Swatter? A Piece of Special Interest Legislation Could Complicate Passage of a Long Overdue FAA Reauthorization Bill BY DAVID COLLOGAN n mid-August, more than 30 aviation organizations representing millions of members signed a letter to Senate leaders pleading with them to finally pass FAA reauthorization legislation. In the face of all that harmony, one uninvited outlier was attempting to force its way onto the agenda in pursuit of its own narrow interests – even if that might mean delaying passage of the reauthorization bill. The outlier is a small company named Flytenow, whose owners dream of making gobs of money by having private pilots use its web site to solicit paying passengers – who will then compensate the pilots for flights in his or her airplane. We wrote about Flytenow a couple of years ago (See “Flight Here, Flytenow,” BAA Sept/Oct 2016). The company began operations in 2014 and was rolling merrily along when in 2015 it requested an FAA interpretation: was it in compliance with applicable FAA regulations? The agency’s response: Flytenow was not in compliance because private pilots cannot solicit potential passengers on the Internet. That would constitute providing “common carriage,” making the transportation providers subject to the more stringent regulations applicable to large commercial carriers. Flytenow suspended operations. The company then dispatched its lawyers to federal court in pursuit of a ruling overturning FAA’s regulations. A three-judge panel of the U.S. Court of Appeals, citing the agency’s expertise in such matters, ruled in favor of FAA. The court also denied the company’s request for an en banc hearing. At that stage, many appellants might decide to call it a day and move on to another enterprise … but not Flytenow. It next petitioned the U.S. Supreme Court to hear its case, a request the high court rejected in January 2017. With its business model forcefully smacked down by both the Executive and Judicial branches of the U.S. government, what do you think Flytenow’s owners did next? They went looking for a member of Congress to save their bacon. In April of this year, Sen. Mike Lee (R-UT) introduced S.2650, the Aviation Empowerment Act. The bill would dramatically broaden the government’s definition of “common carrier,” making it possible for private pilots to carry passengers and receive compensation. Four months later, S.2650 has garnered little support. As of late August not one other senator had signed on as a co-sponsor of S.2650. So why should anyone care about S.2650, you might ask? Well, as the summer wore on, concern grew that Lee might attempt to 18 B U S I N E S S AV I AT I O N A DV I S O R
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offer his bill as an amendment to the FAA reauthorization bill. If that scenario came to pass, Senate leaders might shy away from scheduling floor time for consideration of S.1405, the Senate’s FAA reauthorization bill. The current FAA authorization legislation is due to expire Oct. 1. Getting a new bill enacted before that deadline is the top priority for the entire aviation community. There also is near-unanimous industry agreement that permitting Part 91 private pilots – who have to meet much lower training and experience thresholds than commercial pilots – to advertise for paying passengers would result in a dramatic spike in accidents and fatalities. In 2016, Part 91 pilots were involved in 1,223 accidents and 213 fatal accidents. Part 91 operators posted an accident rate of 5.93 accidents and 0.99 fatal accidents per 100,000 flight hours. Commercial pilots operating under Part 135 were involved in 31 total accidents and 7 fatal accidents. There were 0.89 accidents and 0.20 fatal accidents per 100,000 flight hours involving pilots flying under Part 135. The radical re-ordering of commercial pilot safety standards contemplated in S.2650 should be overwhelmingly rejected. Instead of considering a special interest bill that would primarily benefit one company, Congress should focus on achieving timely passage of new FAA reauthorization legislation that would benefit the entire industry and enhance safety. BAA DAVID COLLOGAN has covered aviation in Washington, DC
for more than four decades. This award-wining journalist is known as one of the most knowledgeable, balanced, wary, and trusted journalists in the aviation community.
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dlcollogan@gmail.com
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