Private business aviation as an alternative to commercial airline travel.

• Author: O'Neil, Cherie

An alternative to commercial airline travel (which is often expensive and cumbersome) is private business aviation. Options include charter flights, timeshares and leases or purchases of a business jet. For purchases, it may be preferable for a related leasing entity to buy the jet, such as a limited liability company (LLC).When purchasing, it is important to take into account the passive activity loss rules if the leasing activity will generate a net operating loss. Net present value (NPV) calculations (which include the new 50% bonus depreciation deduction enacted as part of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)) indicate a strong preference for purchasing a jet.

According to the National Business Aviation Association, companies invest in private aviation primarily to save time and improve employee productivity. With commercial airline service available at 500 national airports and private aviation at more than 5,000, convenience is also a factor. Before committing its resources, however, a company should analyze whether private business aviation meets its travel requirements. This depends on how many employees will be using the aircraft and the cost savings, as well as the transaction's accounting method and the potential tax benefits. A company that wants to use private aviation, but is reluctant to own a plane directly, should consider forming a partnership comprised of employee-shareholders who would lease the plane to the company.

Charter Flight Service

Companies with less than 100 hours of business travel per year will find charter-flight service most economical when four or more employees travel to the same destination. Some charter-flight service companies have recently launched membership programs, permitting companies to purchase a set amount of flying time with few strings attached; see Carey, "Fare Wars Hit the Jet Set: Sharing a Plane for Less," Wall Street Journal (10/23/02), p. D1.

Fractional Ownership

Companies with as few as 100 flight hours per year should consider purchasing a one-eighth fractional-aircraft-ownership interest. Fractional ownership is a lien-free interest not affected or encumbered by other owners' financial obligations, and it offers the benefits of private aviation without the burden of management responsibilities. A company selling fractional-ownership interests manages the owner's interest for a monthly fee, which covers all fixed costs (e.g., pilot salaries and training, storage, regular refurbishment, administration and insurance).

Fractional owners are legally liable for passenger safety and should carry insurance sufficient to cover any admitted or legal liability. In addition to the initial fractional-share purchase price and annual fixed costs, there is an occupied hourly fee based on the number of flight hours per year, which covers fuel, maintenance, flight crew and catering, and Federal excise taxes. This fee is based on the actual time fractional owners spend on the plane flying to their destination (excluding time required to ferry the aircraft to the departure location). If the particular aircraft is not available for a desired flight time, the timeshare company will dispatch another aircraft from its fleet through exchange agreements with other fractional-interest owners.

Most timeshare agreements are for five years and permit carryover of unused hours to subsequent years, as long as the total hours used in any five-year period do not exceed 1,000. Some fractional-ownership programs require a mandatory repurchase agreement every five years, while others involve a simple renewal of the management agreement at prevailing monthly and hourly rates.

Commercial and charter airline expenditures are treated similarly for financial accounting and tax purposes. Charter aviation expenses are deductible as travel expenses under Sec. 162(a)(2) and Regs. Sec. 1.162-1(a) if they are adequately documented and substantiated as ordinary and necessary. The proper accounting treatment of a fractional-ownership interest is determined by whether the transaction is classified as a capital lease (purchase) or as an...