As we enter into the 4th quarter of 2024, many aircraft buyers in California rush to finalize their purchases before the clock strikes midnight on December 31. Whether for business or personal use, an aircraft acquisition represents a significant investment with complex legal, financial, and tax implications. One critical aspect that often catches buyers off guard is California’s sales and use tax on aircraft purchases.
This article explores the key elements for a successful end-of-year aircraft purchase in California, with a focus on minimizing and managing tax liability effectively.
Why End-of-Year Aircraft Purchases Are Popular
Many aircraft buyers choose to complete their purchases toward the end of the year for several reasons:
1. Tax Planning: Buyers may aim to take advantage of available tax deductions or benefits before the new tax year begins.
2. Bonus Depreciation: Aircraft buyers may wish to take full advantage of federal bonus depreciation, which allows for a significant percentage of the aircraft’s cost to be written off in the year of purchase.
3. Fleet Updates: Many aviation companies update their fleets by year’s end to align with financial forecasts and operational needs.
While these factors make the year-end an attractive time to buy, the tight timeframe can lead to rushed decisions that could result in unforeseen tax liabilities.
California Sales and Use Tax on Aircraft Purchases
One of the biggest considerations for aircraft buyers in California is the state’s sales and use tax. The standard sales tax applies to aircraft purchased in California, while the use tax applies to aircraft purchased out of state but used within California. The rate varies by county but typically hovers between 7.25% and 10.25% of the purchase price—a significant amount on an aircraft acquisition.
To ensure a smooth transaction and manage tax liability, buyers should carefully consider the following:
1. Understanding the Principal Use Test for Exemptions
California offers potential exemptions to the use tax under the Principal Use Test, which can be particularly valuable for aircraft buyers utilizing their craft for business purposes. To qualify for this exemption, the aircraft must be used predominantly outside of California during the first 12 months of ownership. Specifically, more than 50% of the flight time must occur outside California airspace. (Aero & Marine requires 60% to provide an error of margin when submitting to the California Department of Tax and Fee Administration.)
Proper planning and documentation are crucial to qualify for the Principal Use Test exemption. Buyers should:
• Plan early: Map out the intended flight schedule, ensuring that more than half of the aircraft’s usage will be outside of California.
• Maintain flight records: Log flight hours meticulously to demonstrate compliance with the out-of-state usage requirement.
• Seek professional guidance: An experienced sales and use tax expert (like Aero & Marine) can help structure flight operations and validate the exemption.
2. Structure Your Purchase Correctly
The structure of the aircraft purchase plays a significant role in tax liability. In California, structuring the acquisition through certain entities, such as an LLC or corporation, may offer benefits in terms of managing tax exposure. However, the structure must be set up correctly to avoid drawing scrutiny from tax authorities.
• Work with an experienced attorney: Setting up a business entity or trust for the purchase of an aircraft requires legal expertise. An attorney specializing in aviation law can help ensure the structure aligns with both state tax laws and federal aviation regulations. Aero & Marine can put you into contact with the appropriate expert.
• Coordinate with a tax professional: Involving a tax expert ensures that the transaction is properly structured to minimize tax liability, taking into account the specific nuances of California tax law.
3. Timing is Critical
Given the December 31 deadline, buyers must pay close attention to the timing of both the purchase and delivery of the aircraft. California’s tax liability is based on when and where the aircraft is transferred and used.
• Delivery location matters: Taking delivery of the aircraft outside of California can significantly impact tax obligations. Buyers should ensure that the location and timing of delivery are planned to either avoid or minimize use tax.
• Documentation of delivery: Keep thorough records of the delivery process, including the location and the date, as these factors are critical for tax compliance.
4. Work with Industry Professionals
The complexity of California’s sales and use tax rules makes it imperative to work with a team of professionals, including:
• Aviation lawyer: An aviation attorney ensures that the purchase complies with FAA regulations, financing arrangements, and contractual agreements.
• Sales and use tax consultant: A tax professional (such as Aero & Marine) with specific experience in California aviation tax law can help guide you through the intricacies of the exemption eligibility, compliance, and documentation requirements.
• Aircraft broker: A knowledgeable broker can assist in finding the right aircraft and negotiating terms that may help mitigate tax burdens.
Conclusion
Purchasing an aircraft at the end of the year in California can be a rewarding investment if done correctly. However, the state’s sales and use tax regulations, coupled with the tight deadlines, require thoughtful planning and careful execution. Buyers can minimize their tax liability by understanding the exemptions available, structuring the purchase strategically, and working closely with experts in aviation law and tax compliance. With the right approach, you can close out the year with a successful aircraft acquisition and a well-managed tax outcome.
Comments