Buying a plane or helicopter is a big decision, and one that should not be taken lightly. There are many considerations to be made during the acquisition process, and it is not uncommon for certain items to be neglected. Here is a list of six important items that are commonly overlooked.
- Not Documenting the Terms of the Agreement in Writing. An aircraft transaction almost always involves a significant amount of money and a multitude of individual agreements between the buyer and seller. Often, the parties will discuss the terms verbally, come to what they think is “meeting of the minds”, and move forward with the purchase and sale of the aircraft without a written agreement. However, as the transaction progresses, it is not uncommon for the parties to find that either they failed to discuss one or more of the critical items in the transaction, or that they never actually came to an agreement on certain terms in the first place. This could cause unanticipated expenses for one or both parties and could lead the transaction to fall through. If the transaction does not occur, and there has been any money spent in anticipation of the purchase, there may now be a disagreement as to who is responsible for covering these costs. Additionally, if a deposit has been made to the seller, the return of this money could also be disputed or delayed.
Many aircraft owners and buyers think that they would rather conduct the transactions on a handshake, because they don’t want to “complicate” matters by spending the time to reduce the agreement to a writing. However, it is often the case that the purchase agreement would actually simplify matters by insuring that the parties come to a mutual understanding with regards to each item before either side has made a substantial investment. If the terms of your transaction are properly documented, you will greatly reduce the likelihood that you are left in limbo if a disagreement or unexpected event occurs.
- Foregoing a Pre-Purchase Inspection. For transactions in which the purchaser is not intimately familiar with the aircraft, it is often a wise decision to perform a pre-purchase inspection before agreeing to buy the aircraft or pay a nonrefundable deposit. While a visual inspection may indicate that the aircraft appears squawk-free, a thorough inspection can often identify problems that might greatly reduce the value or safety of the plane. Finding these issues early in the transaction may allow you to minimize any delay in closing caused by the necessary repairs. In addition, if you determine that the condition of the aircraft is not acceptable, and you wish to terminate the transaction, early identification of these issues will allow you to waste less time and resources, and allow you to move on with your aircraft search.
- Not Getting a Title Search. In addition to verifying the physical condition of the aircraft through a pre-purchase inspection, you are well advised to conduct a title search to determine if there are any liens or other interests clouding the aircraft title.If you unknowingly purchase an aircraft subject to existing liens or other interests, you likely will be unable to readily transfer your interest, and may be responsible to the lienholder and subject to litigation if the lienholder decides to foreclose its interest. By conducting a title search prior to closing, you can verify that the seller will deliver the aircraft with a clear title. However, it is possible that not all liens will appear in a typical title search, and for those who desire additional comfort, title insurance is available.
- Not Properly Planning for Sales and Use Tax. The state in which an aircraft is located at the time of closing will be the state with nexus to levy sales tax on the purchase price. This is a very important point to understand, as you could be inadvertently and unnecessarily exposing yourself to sales tax by purchasing your aircraft while it is located in a state for which you do not have an applicable sales tax exemption. It can often be very costly not to consider the sales tax implications before you purchase an aircraft. Don’t be fooled by the common misconception that registering your plane in another state will exempt you from sales tax in the closing state.
Use tax, which is separate from sales tax, is levied by the state in which the aircraft is based, or one in which the aircraft spends a significant amount of time. You may owe some amount of use tax to the state in which you base your aircraft, even if you paid sales tax in the state of closing (if the two states are different).
Failure to properly consider the sales and use tax implications of your aircraft purchase and ownership is unwise. With some careful planning, you could reduce or even remove the sales and use tax liability stemming from your aircraft purchase and ownership.
- Not Structuring Your Ownership and Operation in Compliance with FAA Regulations. The FAA has enacted policy to attempt to prevent members of the aviation community from offering common carriage services to the public without complying with the requirements of FAR Parts 121 or 135. However, because of the broad manner in which these policies were written, pilots and companies that have no intention of providing common carriage are often in violation of the FAA’s regulations. Special attention should be paid to the manner in which your aircraft ownership and operational structure is established, since violating these regulations could put you at risk for large fines, revocation of your pilot’s license, and voiding your insurance policy. Because of the somewhat nebulous nature of the FAA’s restrictions, and the severity of the potential consequences, you should consult with an experienced aviation attorney before structuring the ownership and operation of your aircraft.
- Missing Out on Available Federal Deductions. Your aircraft can be an invaluable business tool, if used properly. In addition, it can also provide you with federal tax deductions to offset income and lower your tax liability. There are a myriad of considerations to be made when determining the optimal structure for maximizing your deductions, and this structure must be tailored to your company’s aircraft usage profile and business needs. Before planning to take deductions on your aircraft, you should be sure that your structure and usage profile are properly in line with the requirements of the IRS.
Business Aviation Law Group can help you avoid these mistakes, and others. Our team is ready to assist you by drafting and reviewing your purchase agreement, helping you plan for sales and use tax, designing your ownership and operational structure, and advising you on how to maximize the federal deductions which are available. Give us a call today to find out what we can do for you.