The market for private aircraft (fractional ownership, outright ownership, charter and other business models) has had its fair share of booms and air pockets in recent years. The pandemic has also had a big impact, as well as specific tax changes within the US having influenced the market.

Jurisdictions around the world have won or lost edge in attracting private jet business – often a barometer for how high net worth and ultra-HNW people are faring – and within the US, the market is strong, but faces political turbulence.

Under the Trump administration, rules were amended in 2017 to allow 100 per cent expensing on commercial and non-commercial aircraft used in a trade or business, enabling taxpayers to immediately write off the cost of planes acquired put into service after September 27, 2017, and before the start of January 2023. That law allowed 100 per cent expensing by the taxpayer for factory-new and pre-owned aircraft so long as it was the taxpayer’s first use of the aircraft. That appeared to be a welcome boost for the aircraft industry, although it provoked frowns from those who said the former president had given a tax break to the rich. The changes run to 2023.

However, under the Biden administration and in an uncertain political situation, this tax treatment could change, James Rabasca, JD, tax advisor, Summit Financial, told this publication in a recent call.

Changes to this system are going to cause a lot of conversations with some clients, Rabasca said.  

Some states provide incentives for people to register aircraft in some states and use them in others, although certain differences have been smoothed out over recent years. One point in question is “use tax.” Most states impose sales and use taxes of between 3 per cent and 10 per cent on aircraft purchase transactions. Many states also provide sales and use tax exemptions, which should be considered in the ultimate determination as to where to register, and whether to purchase (as opposed to charter).

“States are in a bit of a race to the bottom [on tax]. Montana was a place that went after the market,” Rabasca continued. 

Just as some states, such as South Dakota, New Hampshire, Delaware and Nevada compete as jurisdictions for trusts and company registrations, certain states fight it out for the lowest-tax places for registering aircraft. (The same happens outside the US, with jurisdictions such as Guernsey, Malta, Germany and the Isle of Man competing for aircraft registration business.)

“There seems to now be open competition between states in trying to create an environment that attracts individual and corporate taxpayers. At the same time, there is budgetary pressure on the states to ensure adequate revenue,” Rabasca said.

No discussion about aircraft use can happen these days without discussing COVID-19 and the associated restrictions. Early in 2020 travel plummeted, and waxed and waned during the subsequent partial easements and restrictions. Industry figures hope that 2022 will bring a durable recovery. One paradox is that flying privately – for those who can afford it – arguably becomes more attractive in a health crisis, even though COVID passports and other red tape doesn’t get much easier for the rich. Private jet use worldwide is booming – a fact that will raise the blood pressure of anti-fossil fuel activists. US business jet flight hours rose 16 per cent during early October compared with October 2019, itself the strongest month for activity since 2008, according to consultancy WingX (Reuters, October 21, 2021).

Aviation needs
Helping clients navigate the complexities of private jet use is all part of the job for firms such as Summit Financial, which caters to HNW, UHNW clients and family offices. Rabasca used to work at Ayco, a wholly-owned subsidiary of Goldman Sachs.

People from a new generation are owning and using private jets, reflecting a more diverse nature of HNW individuals in general, he said.

As expectations mount that US official interest rates are headed higher, bringing higher borrowing costs, where does this leave the aviation sector?

“As interest rates rise, borrowing would become more costly. This certainly raises an additional consideration in terms of the decision to purchase a private aircraft (versus charter),” Rabasca said. 

Tax and depreciation considerations are crucial. For a person to get the 100 per cent depreciation on an aircraft means that at least half of the time the aircraft must be used regularly for business.

“It is very important to have conversations with clients up front,” Rabasca said. “Given the complexity of this area, a full conversation between the client, and their financial, tax, and legal advisors is paramount. The best decision is driven by a clear understanding of the needs and expectations of the client.”

Away from the use and taxation requirements of private aircraft, there is also the investment potential. Last April, Alok Wadhawan, head of aviation finance at Muzinich & Co, said in an article that the aircraft market’s valuation had shifted in favor of investors looking for an attractive entry point.