The business aviation community — anyone operating aircraft ranging from multi-engine business jets down to single-engine piston airplanes under either the Federal Aviation Administration’s (“FAA’s”) noncommercial rules (as found at 14 CFR part 91 — usually referred to as “Part 91”) or the FAA’s on-demand commercial air taxi rules (as found at 14 CFR part 135, or “Part 135”) — faces a broad range of issues over the coming year.
Three issues that could be of particular interest to follow are the impact of the Tax Cuts and Jobs Act of 2017, the looming deadline for implementation of the FAA’s Automatic Dependent Surveillance-Broadcast (“ADS-B”) Out requirements, and growing concerns over illegal charter operations.
The Impact of the Tax Cuts and Jobs Act of 2017
Public law No. 115-97 — the Tax Cuts and Jobs Act of 2017 or simply the “Act” — will impact business aviation in at least three areas — deprecation, expensing and the federal excise tax.
The Act now permits purchasers of new and used aircraft placed into service after Sept. 27, 2017, and before Jan. 1, 2023, to depreciate 100 percent of their value during the first year of ownership under certain circumstances. This becomes a third alternative with the accelerated or straight-line depreciation options already in place. However, the trade-off is that the Act eliminates the ability of aircraft owners to conduct “like-kind exchanges” under Internal Revenue Code (IRC) § 1031 that were not commenced before Dec. 31, 2017.
The Act also generally prohibits employers from deducting the cost of providing transportation to employees between the employee’s residence and place of employment, significantly restricts the ability those employers to recognize certain entertainment expense deductions related to business goals that were previously permitted, and eliminates miscellaneous itemized business expenses previously available to individual employees related to their use of business aircraft.
Finally, the Act settles an on-going dispute between the industry and the IRS regarding whether aircraft that are operated by their business owners under Part 91 with the assistance of outside management companies should be subject to the Federal Transportation Excise Tax (“FET”) by amending IRS § 4261 to add the clarification that owner flights on managed aircraft are not subject to FET, but are instead subject to the non-commercial fuel tax.
The ADS-B Out Deadline
ADS-B is a technology that forms the foundation for “NextGen” by moving air traffic surveillance from ground radar and navigational aids to precise aircraft tracking using satellite signals. A subset of this technology is “ADS-B Out,” which allows aircraft to broadcast their precise positions and other information to the FAA while in flight. In May 2010 the FAA promulgated rules 14 CFR §§ 91.225 and 91.227, which mandate that aircraft operators must install ADS-B Out no later than Jan. 1, 2020, if they wish to fly in controlled airspace, i.e., the airspace used by most business aircraft. In short, if such operators do not meet this deadline, they will effectively be grounded on the first day of 2020 unless and until they finally do so.
Many business aircraft operators, however, have failed to pay heed to this pending mandate for a variety of reasons, and the industry is realizing it may be boxed in. The FAA and many industry commenters have recognized that it may be getting to the point that there simply will not be enough maintenance-facility capacity to complete these installations, even if every owner immediately tries to get in line for the upgrade. (See, e.g., King Air Magazine, “The ABCS on ADS-B,” June 8, 2017.
Growing Concerns Regarding Illegal Charter
A final issue to watch is the proliferation of aircraft “dry leasing” programs that could be deemed to be illegal charter operations by the FAA. “Wet leases,” as defined in 14 CFR § 110.2, involve the leasing of an aircraft together with a crewmember, and the FAA presumes that this type of lease is commercial in nature and therefore must be conducted under Part 135. Conversely, “dry leases” are leases of the aircraft only, and the question of whether the flight can be conducted under Part 91 turns to how the lessee will use the aircraft.
The problem is that many aircraft managers who don’t hold appropriate Part 135 certification are setting up programs that they assert are based on dry leasing and can be conducted under the more flexible and less expensive Part 91, when in fact they are essentially providing an air charter service simply called by another name. This practice raises significant safety concerns, as well as competitive concerns from properly-certificated air charter operators who have to face unfair price competition from these programs.
In light of this issue there has been growing pressure on the FAA to enforce against such operations, which in turn means that clients who get wrapped up in such activities could face any number of different bad outcomes ranging from FAA regulatory enforcement actions to civil litigation.
David T. Norton is a partner and head of the aviation practice at Shackelford, Bowen, McKinley & Norton, a former Chair of the Aviation Section of the State Bar of Texas, an Airline Transport Pilot and Certified Flight Instructor who is very active in multiple business aviation groups such as the National Air Transportation Association and the National Business Aviation Association, and a frequent speaker and author on various issues impacting the business aviation community.