With many of the big decisions in life, and buying an airplane is definitely one of them, it takes a bit of discipline to make decisions that balance practicality and emotion. That’s understandable, as those kinds of decisions, from buying a house to deciding on a new job, revolve around some of our most important hopes and dreams. So when it comes to finding that perfect set of wings, emotions, understandably, are in the mix. After all, the reason we want to buy an airplane in the first place is because we love flying, and we should never forget that fact. At the same time, emotion can lead us to forget the practical considerations in buying a plane, and after the first blush of that new plane is gone, the practical considerations remain.

So, how does one find the right airplane, one that fulfills the passion of flying while also making sense in terms of mission and expense? We’d suggest that you follow a checklist, just like we do when we go flying.

Granted, a lot of the considerations we outline are more complicated in real flying life than we have space to get into, but by running your overall purchase plan through these rudimentary filters, you’ll likely wind up in a better place when it’s time to rotate on that first flight in your new bird.

What are your needs as a pilot?
When going through the airplane buying decision, it’s tempting to focus on the airplane. That’s natural, but we can get some really useful insights into what the right plane might be for us by looking at the “us” part of that equation. Once we have the airplane safely tucked inside the hangar, we’re left with the realities of operating that equipment. In some cases, that might mean an intensive course of study, hitting the books, flying with experienced instructors and logging time as necessary around the patch and in benign weather before tackling more complex missions. For getting the necessary training and putting in the time.

For pilots without a lot of experience in higher performance airplanes but who still want to go higher and faster in their new plane, the smart thing to do is find a mentor pilot to fly with. Flying single-pilot is a challenging thing to do when things get busy, and when you’re in a faster, more complex aircraft in denser airspace and with weather, a lot more things happen a lot faster. That’s when experience becomes indispensable. Knowing what kind of airplane you want is great. Being realistic with your readiness to fly it is even more important (something your insurance company will reinforce for you). So know your limitations, respect the demands of the airplane you’ll be flying, and make sure to make conservative decisions.

This is where becoming part of a pilot community can really pay off. For a lot of pilots joining a partnership or a small flying club is the best call they can make. Not only do you get more airplane than you could otherwise afford and for less, but you get the benefits of the experience of your partners with operating the specific airplane you’ll be flying while taking advantage of their collected wisdom (assuming these partners are the kind your mom would have been okay with you hanging around with). Such community support can prove invaluable in helping you learn the lessons your new plane has to teach you without having to make all the mistakes we typically make in getting there.

For pilots buying a whole airplane, and there’s a lot to be said for that decision, too, it makes sense to find that community in different places, with friends who fly similar platforms or in owner’s groups online or nearby. It’s also a great way to get more fun out of your plane.

Define your Mission:
The way the airlines decide what kind of planes to buy when there are literally billions of dollars at stake, is by defining their mission as specifically as they can. For us personal flyers, the analysis doesn’t need to be done by a team of eggheads, but knowing what we’re going to use the plane for will help define many of our buying considerations. While we may see ourselves blasting across the country in a Bonanza, when we look at how we’re likely to use the airplane, in many cases we might be better off with a Skyhawk. For some of us, that perfect airplane might not be one that’s intended even remotely for cross-country flying. Do you like exploring the outback or carving loops in the blue skies above? Instead of that Bonanza, maybe a Carbon Cub or Decathlon would be the right plane for you.

If you’re convinced you’ll use the airplane to get places, as many of us do, think about what kind of trip is your typical mission. As much as you might like to jet off to Kona from LA for a long weekend, if your real trip is more likely to be from San Antonio to New Orleans, that’s the one you should focus on.

For some of us, those typical trips will be, well, pretty typical. For others of us, our trips could be all over the map, literally and figuratively. So, how varied are your typical missions? If you might one weekend head up to Wyoming for a grass-strip steak and guitar outing, and the next weekend find yourself off to Seattle for a professional conference, then you need versatility. A Cessna 185 or Maule MX-7 makes great sense. If you’re more likely to do one or the other, you’d be better off with an airplane that’s built for a specific kind of flying, perhaps a nice used Piper Archer for the cross-country flying or a Cessna 180 for the gravel bashing. You’ll pay less for less versatility and very likely be a lot happier with the monthly bills.

If you’re convinced that flying for transportation is the way you’ll use your airplane, then work to define that kind of mission in more detail. A good baseline to start from is the 500-nm trip, because that’s a length that’s pretty common and commonly doable in one leg for most rank-and-file piston singles.

How long is your typical mission?
If you’re convinced that flying for transportation is the way you’ll use your airplane, then work to define that kind of mission in more detail. A good baseline to start from is the 500-nm trip, because that’s a length that’s pretty common and commonly doable in one leg for most rank-and-file piston singles. A trip from Orlando Executive to Peachtree DeKalb near Atlanta, for instance, is just less than 400 nm. You can get this kind of trip done in a Skyhawk, though a Cirrus SR22 will save you a lot of time, around 90 minutes on a trip of this length. While that might not sound like much, it translates into much better flexibility. In this example, it means you’ll likely be able to make it a one-day trip, with travel to the destination, business conducted, and travel home all in one day, something that would be lengthy, fatiguing and possibly risky, depending on weather or other circumstances, in a 172. If your trips are more leisurely and less time constrained, then a slower airplane might make sense and save you a bundle, too.

The demands and risks associated with long cross-country travel are very real, and expensive airplanes often have expensive gear to address those very real concerns. Anti-icing equipment like TKS or pneumatic boots, turbocharged engines, radar, capable autopilots and oxygen gear all increase the price of a plane but are there for very good reasons. Consider how much you’d need them by asking this simple question. Are you going to fly IFR and view your plane as a transportation craft? If so, be realistic about the kind of plane you’ll need. On the other hand, if you plan to fly VFR or IFR in only the most benign actual conditions, then you can get away with less. Certainly a well-equipped Skyhawk with a decent autopilot makes a great platform for such flights.

Another big consideration is terrain. If you’re in the western half of the United States, or some other geographic region of the world where there’s big rocks out there, then there’s probably no such thing as too much power or too much margin. Hot and high days ask a lot of single-engine airplanes (of every kind of aircraft, the truth be told), so having a 235-hp Cessna 182 instead of a 150-hp 172, even though it might be more airplane than you typically need becomes a godsend when the density altitude climbs to a mile high.

Analyze The Costs
As with many big ticket items, the purchase price of a plane represents only a fraction of the overall cost picture. Ongoing costs include insurance, hangar or tie-down, ongoing and regularly required maintenance, fuel, engine oil and care and cleaning, among others. Know the costs going in, and be ready to address them. That will surely mean putting some cash into a reserve account for that new engine and prop when the time comes. If the math doesn’t make sense for a later-model used high-performance plane given the financial realities, look at more affordable options. That might mean an airplane with less range, less payload, or, dare I say it, less speed. Nevertheless, being happy with a modest airplane you can afford is a much happier situation than struggling with a more capable one you might not be able to keep.

Family Matters
Not every family is a flying family. That’s just the fact. Spouses who also fly or who just love airplanes or going places in small airplanes are the best, and if we’re lucky enough to have such a family, then we need to plan our airplane purchase with the entire clan in mind.

As families grow, so too do our airplane needs. When kids are little, a four-seater like a Grumman Tiger is a great transportation airplane. As they grow, you’ll find you probably need more space and more capability, so a 182 or Model 36 Bonanza makes more sense. Sometimes, that means as the family grows there might be the need to step up in terms of payload and utility. Then again, if you can manage an airplane that will grow along with your needs, why not start there?

Great family airplanes run the gamut in terms of complexity, cost, capability and demands, from Skylanes, which can keep a family of four happily traveling from car seats to college, to King Airs, which can theoretically accommodate the grandkids at some point down the line.

Speed and why it’s Our Friend
If you’re flying an airplane for transportation, the whole idea is to get somewhere with it. The flying, granted, is great, but for many of us, an hour of beautiful desert views is as good as three. That said, the acquisition cost difference between a fast airplane, like a nice Mooney 201 and an equally nice fixed-gear Cessna Cardinal, can be substantial (though the ongoing costs of ownership in some cases are less so).

For those trips of around 500 nm, the need for speed is still very real, though it’s when those legs stretch out even farther that speed really matters. A trip of 1,200 nm will require a stop in most fast airplanes, and at a cruise speed of 170 knots, you’re looking at a seven-plus-hour trip, not counting that fuel stop you’ll need. In a 125 knot airplane, that same trip translates to better than 9 hours, not counting the two or three fuel stops that will be needed. And when you work headwinds and short, winter days into the equation, things get ugly. This is even more the case when you consider that those less fleet airplanes are typically less capably equipped, so when adverse weather rears its nasty head, there are fewer options, less safety margin and greater likelihood that the trip will last an extra day or two.

Chances are good that if you’re considering buying your next airplane, you’ve already thought through a lot of these decisions. For those pilots looking to buy their first airplane, running these simple tests is a great way to narrow the field of possibilities from the dream team to the home team and then, hopefully, down to the exact model of airplane that will best fit your needs, your budget and even, if you follow your heart just the right amount, your dreams too.

* Budd Davisson contributed to this article.

VFR vs IFR and Your Purchase Decision

By Isabel Goyer

Without a doubt, the ticket that most changes the way we fly by giving us new tools and new strategies is the instrument rating. After you’re an instrument pilot who practices the craft, you look at flying in a whole new way. With an IFR rating on the certificate in your wallet you are no longer held hostage to the whims of an otherwise benign cloud deck. With an IFR rating, an overcast layer at 800 feet is hardly even considered weather. With this in mind, it makes sense to think about how your next airplane will work as an IFR platform.

There are several big considerations here, but none is as important as having a decent (or better) autopilot. We live in a strange time when many student pilots graduate from a flat-panel equipped trainer with a digital autopilot and then immediately go back in time a few decades to the age of steam gauges, mechanical gyros and adrenaline. S-Tec autopilots (most are what are known as “rate-based” units) are ubiquitous in older airplanes, and for good reason. They work great, they’re affordable, and they are STC’ed (approved for retrofit) into just about every kind of single and twin-engine piston plane you could imagine, and literally many you’d never think to imagine. Now manufactured by Genesys AeroSystems, they are also readily available for retrofit into used airplanes without an autopilot or with an outdated one.

At a minimum, you want a wing leveler, because that can greatly cut the risk of loss of control in IMC, but altitude hold is great for staying on altitude and avoiding trouble with the nice people at the FAA.

For higher-end transportation airplanes, an attitude-based autopilot will capture that glideslope more accurately and hold in turbulence much more doggedly than a rate-based flight control unit can.

The next consideration is a backup source of altitude guidance should the vacuum pump in a legacy system go south. Strangely enough, one of the best backups you can have is a rate-based autopilot, because they do not rely on attitude but on rate of turn data to keep doing their thing. There are also a number of great standby instruments available from MidContinent Instruments, Aspen Avionics, BendixKing, L3 and others that you can install and immediately start breathing a little easier once you enter the clouds.

There are other equipment considerations to make when vetting your future ride for IFR duty. These include anti-icing gear, oxygen, moving maps and more, some of which are pricier than others and some of which are simply unavailable on some platforms.

The best equipment for real IFR flying, it goes without saying is a well trained and proficient pilot. A good autopilot comes right after that.

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The post So You‘re Thinking Of Buying An Airplane appeared first on Plane & Pilot Magazine.

No dream stirs a pilot’s soul more than that of owning an airplane. From the moment a student starts renting aircraft, the idea of owning one never stops calling. As a pilot gains experience in aviation, their mission becomes clearer, and the kind of aircraft a pilot prefers—from technically advanced to vintage classic— starts to surface. From then on, nothing takes the place of that prodding desire to own an aircraft.

It seems almost obscene to be writing about owning an aircraft in today’s climate of half-a-million-dollar price tags. It’s no secret that the cost of ownership has risen to the point where sole ownership of a new airplane takes some considerable resources to pull off, or that fewer of us can afford to own an aircraft outright.

Cheap aircraft ownership was one of the chief reasons that aviation flourished after World War II, ushering in what we now refer to as the “Golden Era” of general aviation. In fact, even though I’m a product of the relatively recent 1970s (in GA terms), I remember “For Sale” signs on Piper Cubs and smaller Cessnas in the $3,000 range! When I was in the fourth grade, a neighbor of ours bought an old P-51 Mustang for the outrageous sum of $10,000. Today, that wouldn’t buy the warbird’s Plexiglas canopy.

Still, aviation ownership is possible. The nature of it has changed—one reason is that flying clubs are starting to flourish—but owning an aircraft is still one of the most rewarding feelings. When I hear pilots complain that “nobody can own an airplane anymore,” I point to the dozen or so ads in every issue of Barnstormer or Trade-A-Plane advertising Cessna 140s, Piper Tri-Pacers, Aeroncas and a fistful of others—all for under $20,000. Put four pilots together to buy an aircraft like that, and you’ve got a dandy, four-gallon-per-hour fun machine that costs less to own than an old Buick. Ownership isn’t impossible—it’s just not as freewheeling as it once was.

If you have the resources, new aircraft offer an experience that matches (and sometimes beats) the airlines, and we’ve written about plenty of those in this magazine. We live in an era of 250- knot, fixed-gear piston singles and air- conditioned cruisers that can transport four people a thousand miles in any direction without stopping. On the light- sport front, a hundred grand will put you in a brand-new little sport coupe with great handling and miserly fuel consumption. Throw in an extra $25,000, and the LSA world opens like an oyster, revealing so many different aircraft that it puts Willy Wonka’s factory to shame.

Financing
Most individuals who want to purchase an aircraft either don’t have the cash to do so or have business and tax reasons that prevent them from buying the aircraft outright. Third-party lenders will loan the money to these individuals. Financing the purchase of a private aircraft is similar to a home mortgage in many ways. The basic financing process for a small personal (or even corporate) aircraft is as follows:

1 The prospective buyer (“borrower”) fills in an application with basic information about themselves and the aircraft they propose to buy and submit the application to a lender.

2 The lender performs an appraisal of the aircraft’s value.

3 The lender performs a title search based on the aircraft’s registration number. They confirm that no liens or title defects exist. The lender might procure a title insurance policy to protect against any undetected problems with the aircraft’s title.

4 Lender prepares the following transaction documents:
Promissory note: This makes the borrower responsible for any loan balance not covered by repossession of the aircraft, if the borrower defaults on the loan.
Security agreement: Establishes a security interest in the aircraft by the lender so they can repossess it, in the event the borrower defaults on the loan.
Third-party guarantee: If the borrower has a questionable credit score, the lender may require a security assurance from a third party (or parties) that confirms they’ll cover the loan if the borrower defaults.

5 At closing, the loan documentation is executed (signed), funds are wired to the seller and ownership title transfer is completed.

An aircraft buyer looking for financing has a choice of lenders to approach. Some banks, like Bank of America, have special relationships with pilots and are accustomed to making aircraft loans. In Bank of America’s case, they’ve established ties with AOPA and offer a number of financial products specially geared toward pilots. The advantage of a bank that has experience with aircraft lending is the speed and efficiency with which the transaction is completed. Experienced lenders can do the title search quickly because they already have relationships with those entities. The same thing goes for securing the right paperwork and accurately appraising the aircraft. Credit unions are similar to banks and often offer aircraft loans.

Independent dedicated lenders are the third option for financing. These include companies like Dorr Aviation, AirFleet Capital, AirLoan and National Aircraft Finance Company, among a few others. Dedicated aviation lenders like these know exactly how to handle your transaction and are experienced in the nuances of aircraft purchases.

In all cases, the best advice for prospective buyers is to get pre-approved. Pre-approval for financing allows a buyer to act quickly if the right deal is found and gives the buyer time to look for an aircraft with the security that financing is ready.

There are some basic requirements to meet before you may qualify for an aircraft loan. Typically, these are:

• credit Score of 700 or better
• debt-to-income ratio of 35% to 45%
• a 15% to 20% down payment
• sufficient “reserve” funds so the aircraft purchase doesn’t leave you with empty bank accounts
• a 20-year payback term is typical, similar to a mortgage

Insurance
Insurance is where many owners are misinformed and where the greatest confusion exists. We spoke with Greg Sterling, senior vice president and global product line manager for AIG, one of the biggest insurers in general aviation, to help dispel the myths about insurance.

Sterling explained that the essence of an insurance policy for an aircraft is that the insurer is weighing the risk that it may have to pay out on a claim in the event you damage the aircraft. The insurance company charges you a “premium” (or fee) in exchange for its acceptance of this risk. The greater the risk, the more expensive the insurance premiums will be. The factors that affect your insurance premiums include the type of aircraft, time in type, general pilot qualifications and ratings, and the nature of your operation. An aircraft insurance policy covers two areas: hull coverage and liability coverage.

The term “hull coverage” originated from the fact that the world’s first aircraft insurance policies were based on maritime (ships and boats) policies, because they were the closest thing available at the turn of the century. This covers physical damage to your aircraft and comes in three types (in order of cost):

• Full flight coverage (this covers the aircraft at any time, sitting still or flying)
• Ground and taxi coverage (refers to any time the aircraft isn’t flying)
• Ground, not in motion (exactly what it says—the engines can’t be operating)

You should only carry as much hull coverage as your aircraft is worth. Thinking that they’ll be “extra secure,” some owners will insure their aircraft for a sum greater than the appraised value. According to Sterling, overinsuring is a mistake.

Under a normal policy, if you have an aircraft accident and the estimated cost to repair that aircraft exceeds 75% to 85% of your hull insurance policy limit, the insurance company will declare the aircraft to be a total loss and pay you the coverage limit (less deductibles). But, if the damage is less than 75%, the insurance company could require you to repair it.

Say you insure a $100,000 airplane for $140,000 and you have an accident that causes extensive damage to the aircraft. If the repair cost is less than $105,000 (75% of $140,000), the insurer could require you to repair it. A $100,000 repair is basically a wrecked airplane. In that scenario, you’d be stuck with an airplane that will take six to 12 months or longer to completely rebuild and will have lousy resale value because of the damage history, not to mention the bad ju-ju of a wreck.

Underinsuring is just as bad. If you underinsure an aircraft to save on monthly premiums, you could lose a potentially valuable aircraft. In that scenario, an owner completely refurbishes a $70,000 aircraft with new paint, interior, the latest advanced glass panel and a slew of avionics, bringing its true value to around $100,000. The owner insures it for $50,000. If the owner experiences a prop-strike or minor collision on the ground, the engine would have to be torn down. That could mean a repair bill of around $40,000. Because that exceeds 85% of the insured value, the insurer could take possession of the aircraft and leave you with a check for $50,000, less deductibles and salvage price. Meanwhile, you lost a perfectly good aircraft with a fortune in upgrades.

The moral here is that you should insure your aircraft for exactly what it’s worth in market value. “Neither over- or underinsuring is of any benefit to the owner,” added Sterling.

Liability is the second feature of aircraft insurance. It protects you from liability or responsibility to third persons for damages they may suffer resulting from the operation of your aircraft. With liability coverage, the insurance company will pay the third party directly, up to your policy limit.

Liability coverage comes in two forms: “sub-limit” coverage or “smooth” coverage. This pertains to the language in your policy that refers to “per occurrence” and “per passenger.” Sub-limit coverage is a policy that provides for $1,000,000 per occurrence and $250,000 per passenger. It means the maximum total amount the insurance company will pay is $1 million dollars, but only in $250,000 increments to each passenger. If you have a two-seat airplane and the passenger is injured, the policy will only pay a maximum of $250,000. The rest must come out of your pocket.

“Smooth” coverage is more expensive but extends the per-passenger amount to the policy limit. In the previous scenario, smooth coverage would mean that the accident would result in the insurance company paying up to $1,000,000 to that one passenger. If two passengers were involved, smooth coverage would pay $500,000 each.

Because insurance can be a complex subject, we also spoke to Jon Harder from Aviation Resources, another large insurer of general aviation aircraft. One of the bits of insurance advice he offered was compelling owners to also purchase non-owned (“renter’s”) insurance. According to Harder, such insurance helps cover the “gap” between your normal policy’s deductible and the insured amount. “Even if they buy non-owned insurance for the liability coverage, it’s worth it,” said Harder. “For the price of an hour with an attorney, a pilot could get a non-owned policy that could be critical in the event of a claim against the standard policy.”

There’s much more to the aircraft- buying game and prospective owners would be well-advised to research all they can, prior to making a purchase. Some additional areas to investigate are pre-qualification calculators to help you determine how much aircraft you can really afford, the pre-buy inspection that’s a key task in buying a used aircraft, consideration of partnerships and fractional ownership, and—as AOPA has been promoting—the idea of purchasing an aircraft for use in a flying club. They’re all factors to consider in fulfilling your dream of finally owning an aircraft. Trust me, there’s nothing like it.

The post Dream Big: Buy A Plane appeared first on Plane & Pilot Magazine.

This year has produced quite a few tax law changes that will impact general aviation and the business use of aircraft. There are extremely favorable depreciation deductions with bonus depreciation rules, and for selected new aircraft purchases, this could possibly carry over to 2013 to allow time to complete the purchase. The 2012 Section 179 depreciation rules are very favorable, but they’re likely to lose a lot of their benefits in 2013. There are two issues that will affect your tax situation, along with an old and frequently asked question by those who are new to aviation. You’d also be surprised how often this same question—the tax deductibility of flying lessons—is posed by long-time pilots who want to add to their ratings.

Capitalization Versus Repair
The IRS issued a new set of “temporary” regulations as of January 1, 2012. For the record—while these are “temporary” regulations, they carry the full weight of the law and must be complied with until they’re withdrawn or made permanent. They count! While the intent of the new regulations was to simplify and coordinate the application of the tax law with the court decisions that have been handed down over the last 10 or so years, as we’re becoming more familiar with the 160 pages of regulations, we’re finding more new questions than answers to old questions. In order to comply with the regulations, you may even have to apply to the IRS for permission to change your method of accounting. So much for simplification.

If you’re in the market for purchasing an aircraft (especially a used one that you’re planning to make modifications and improvements to), a firsthand knowledge of the new regulations may save you from an unplanned tax result. This could be the case where a buyer and seller are negotiating the sale and the point of the annual inspection or TBO comes up. Being aware of the new regulations could make a difference in the negotiations, and both the buyer and the seller just might improve their tax position.

While we all think about airplanes when we think about aviation depreciation, there are a lot of other things involved in aviation besides the aircraft. Do you own a hangar? Regardless of whether you own or rent your hangar, do you have any tools in there such as air compressors, hoists, workbenches, dedicated wiring or partitioned-off office areas? All of these items are depreciable and they may not have the same depreciable life as your plane. The new regulations amplify the point of selecting the proper depreciable life and method the very first year. If you make a mistake and call a seven-year asset a five-year asset, the IRS will tell you to slow down the depreciation deduction and use seven years. But if you take a five-year asset and mistakenly classify it as a seven-year asset, then the IRS can say that you don’t get the last two years’ depreciation. To correct this, filing an amended return or Form 3115 to request a change in your accounting method may not work. You may have to file a request with the IRS in the form of a private letter ruling to make everything right. Sometimes, there’s truly a question mark on what is the proper life. My advice is to select the shorter life rather than the longer life. You can always slow down, but it’s hard to speed up the depreciation deductions.

While we all think about airplanes when we think
about aviation depreciation, there are a lot of other
things involved in aviation besides the aircraft. Do
you own a hangar?

There’s a blessing to aircraft owners in the new regulations. My old advice was that when an annual inspection or TBO was coming up, I’d recommend that you bring the plane in early just to get the ordinary and routine items cleaned up as normal repairs and maintenance. Then when the plane was in for its annual or TBO, there should be little to no doubt as to what the annual consisted of, and then you’d have to make a decision about expensing or capitalizing the cost of the annual or TBO depending on what became involved. But you’d take care of the routine things ahead of the annual and they wouldn’t be a factor in the annual. The maintenance expense would have been protected, and maybe there wasn’t enough other stuff done at the annual that would require the cost of the annual to be capitalized. Now I have the luxury of changing my advice. The regulations make it clear that as long as normal repair work can be identified and segregated at the time major capitalized work is being done that the repair items, assuming they’re identified and separately stated, will be treated as repair and maintenance. Make sure your A&E mechanic helps you out with this.

The repair regulations are found under 1.263(a)-1T. Be careful not to confuse them with 1.263A. They aren’t the same.

Tax deductions for flight lessons will depend on circumstances and whether or not the expense is customary relating to the particular business environment.

Final Regulations For Aircraft Entertainment Use
The issuance of the final regulations for Code Section 274 still classifies your airplane as an entertainment facility and as such is subject to the rules of IRC Section 274. Since the Sutherland case back around the year 2000, the IRS has been trying their best to either disallow tax deductibility of certain nonbusiness or personal use of business aircraft, or have it be a source of taxable income to the individual who took the personal flight. The IRS tried to prevail in court—but lost. Then the IRS went back to Congress and had Congress rewrite Section 274. Now the IRS has handed down how they’re going to interpret and apply Code Section 274. The taxpayers have been given a small window of time to comply with the final regulations, which take effect for tax years beginning after July 31, 2012. For calendar year taxpayers, this means that starting January 1, 2013, you will have to play by the new rules.

To be clear, the IRS is going after businesses who claim a tax deduction for their aircraft being used for personal nonbusiness purposes by “specified individuals.” These “specified individuals” are defined as those who own directly or indirectly more than 10% of a business, who’s a director or officer of a business, or someone who doesn’t have an officer or director title but has comparable responsibilities and duties to that of a company officer or director. Basically, no more name games or title games. The final regulations also deal with two other user classes of aircraft users. These are employees who aren’t “specified individuals” and a final class of individuals who aren’t employees and aren’t specified individuals. That covers every possible person. Nobody is given a free pass from the regulations. They’ll just be handled differently.

The final regulations basically followed the 2007 proposed regulations. Even though the answers weren’t the ones we wanted, the final regulations did resolve many of the questions and points that were being tossed around regarding what expenses were to be included as operating expenses and the alternatives to charging those expenses to a passenger. Basically, all of the aircraft expenses (fixed and variable) are being thrown in and counted. It’s imperative that the regulations be followed. Otherwise, you run the risk of not being able to deduct your aviation expenses, which includes depreciation. If you discover either on your own or upon an IRS audit that you have run afoul of the rules, then the individual who took a personal flight may have taxable income to report and there could be another obligation for unreported and undeposited payroll taxes by both the employee and the employer. And naturally, there are penalties pertaining to the payroll tax issue. It never ends and it never quits.

If you own a plane, my advice is that either you or your tax preparer have Code Section 274 committed to memory and that you maintain a seating chart for every seat in the aircraft and you know who’s in every seat on every flight. Then, deal with the tax issues to everyone accordingly. It costs a lot of money to buy an airplane without considering the operating cost, and depreciation deductions alone are tremendous. You won’t be happy if these deductions are disallowed by the IRS.

Are Flying Lessons Deductible?
This question pops up more frequently than you can imagine. “Can I get a tax deduction if I learn to fly a plane?” I get this question from people who are just starting to get interested in aviation, as well as those who have been flying for many years and want to upgrade their ratings. Oftentimes, the person new to aviation depending on their facts, circumstances and situation has a better chance of getting to “yes” than someone already holding their ticket.

This issue went to trial early in 2012. Even though the taxpayer lost, had the taxpayer fulfilled his responsibilities, the judge just may have gone along with the taxpayer and let the taxpayer have the deduction. But the taxpayer failed in his responsibilities so the judge had no choice but to rule not necessarily for the IRS but against the taxpayer. All the IRS had to do was to sit back and watch because the taxpayer brought nothing to trial.

To be tax deductible, an expense must be ordinary, which is considered to be normal, usual or customary relating to the particular business environment for which the expense was incurred as well as be necessary to the particular business environment, which is defined as being appropriate and helpful to the taxpayer’s trade or business. This is a classic definition from Code Section 162.

In the case under discussion, the taxpayer was involved with real estate as a commercial realtor as one of his business interests. For three years, he hired a pilot to assist him in taking aerial photos of property he was trying to list and sell. Then he got the idea to get his pilot’s license and his own plane and save the expense of hiring a pilot. This is somewhat reasonable on the surface. But he ran into the following problems with the judge. He couldn’t convince the judge that becoming a pilot maintained or improved his skills as a commercial realtor. So there went the education angle. He had no valid argument why he was in a better business position than he was before when he hired a pilot for the three preceding years. So there went the ordinary and necessary argument. The taxpayer failed to produce receipts and/or invoices for the flying lessons and other expenses, and he stated to the judge that he didn’t know that he needed to keep those records. So there went the burden of proof issue. And there went the case.

Every case and situation stands on its own. The courts will consider and allow deductions for flying lessons where the deduction is legitimate. But there has to be a bona fide business purpose and you must meet the burden of proof standard. Oftentimes, these deductions are generated by a closely held business that’s owned by one person or a small number of individuals. The owner(s) agree that there’s a bona fide need for a plane, and the economics of getting someone ticketed and owning a plane are more beneficial than the cost of leasing or chartering an aircraft or commercial airline travel. As such, one lucky soul gets the pleasure of learning how to fly. When I have this situation, I recommend that his job description and duties be revised to include that this person will acquire their pilot’s license, maintain their currency and maintain their medical at all times. This is so the plane can be flown at a moment’s notice. I also recommend that a statement be put in the corporate annual minutes describing the benefits of airplane ownership and reaffirming the business decision to continue with the ownership and expenses of the plane.

There are approximately 15,000 airports in the United States. Of these airports, approximately 5,000 have paved runways. Of these, 376 airports have regularly scheduled flights. Also, 86 airports process more than 1 million passengers a year. Only 25 airports process more than 10 million passengers a year. If long- distance travel by your company is an issue, I suspect that there are many small airports that can handle the smaller planes of general aviation that can get you to your destination a lot easier than going through a major terminal. The cost of getting an executive out in the field, getting their job done and returning them back to the office will probably be less than going the commercial route when you consider all of the time costs associated with the trip. Time is money.

Pilots want to increase their skills and expertise. As such, they want to advance their ratings. And this will be a problem when it comes to being tax deductible. Sooner or later, you’ll become so rated that you’ll have qualified yourself for a new profession. You technically can get a job as a commercial pilot. It doesn’t matter that you have no intention of doing so; the defining point is that you have qualified yourself for a new profession. And that fact will disallow the deduction.

General aviation will be greatly impacted by these and other changes for 2012. The time and effort to keep up with the tax arena will be a big benefit as you deal with your tax preparation.

O. H. “Harry” Daniels, Jr. is a CPA, a CFP licensee and a certified valuation analyst. He’s a partner with the firm of Duggan, Joiner & Company, Certified Public Accountants and can be reached at ohf@djcocpa.com. Daniels has held his license as a private pilot since 1991.

The post Aviation Taxes 2012 appeared first on Plane & Pilot Magazine.

It’s no secret that learning to fly is expensive. Recent studies by AOPA and other general aviation groups have confirmed that the cost of flight training is one of the major barriers to entry into aviation for the average person. Those studies are a direct result of the fact that student pilot starts are at a historic low while the projected need for pilots in the coming years is uncharacteristically high. The convergence of the two is causing great worry in every corner of aviation, and much of the focus of various industry groups has been how to reduce the cost of flight training.

Traditional sources of financing aviation have transformed in recent years or have disappeared altogether. Many lenders left the aviation-financing market as the current financial crisis deepened. Sallie Mae loans—a staple resource of flight-training cash—severely cut back the number and amount of their loans in 2008. Even the GI Bill has morphed from its original form to something altogether different. It’s simply not as easy today to find sources for funding flight training.

It’s important to divide aviation training into its two components: the academic, educational side, and the flight training/ratings side. That distinction is important because different financing is available for each aspect, with more opportunities available on the academic side. In addition, students have a choice of going to a flight-training academy that specializes only in accelerated flight training and ratings acquisition, or to a flying program that’s part of a college or university that offers both flight training and a degree program, fulfilling both requirements. In our search to find the best financing sources, we spoke to both academies and colleges to bring you the latest on financing your flying goals.

Scholarships
If you think scholarships only apply to college aviation programs, you’d be surprised. All the academies we spoke with offered sources for flight-training scholarships, though many student pilots don’t consider them. In fact, this relative obscurity makes scholarships the first source of funding that prospective pilots should investigate. Kurt Barnhart of Kansas State University tells us, “Hundreds of thousands of dollars in scholarships go unrewarded each year.” The trick for the student pilot is finding them.

Every flight-training student should invest in a publication called The Collegiate Aviation Scholarship Listing, available from the University Aviation Association website (www.uaa.aero). For just $19.95, the book (also available on CD) consolidates publicly available information concerning aviation scholarships in one place. The publication describes how to obtain applications for more than 700 aviation scholarship awards with a total value in excess of one million dollars.

The second trick is combining small scholarships together for larger dollar amounts. For example, many EAA chapters offer scholarships that range from $250 to $1,000. The 99’s organization has many scholarships in the same dollar range, as do niche organizations like the Regional Airline Association and many others. Probably out of laziness, few people apply for these smaller awards. Combining three, four or more of these scholarships could fund a lot of training. Even more surprising is that many require nothing more than meeting an application deadline, supplying a reference letter and writing a short essay. There’s a free database offered of some 300 aviation scholarships on www.nextstudent.com.

Federal Grants And Loan
Unlike a loan, a Federal Pell Grant doesn’t have to be repaid. A Pell grant is a monetary award given only to undergraduate students who haven’t yet earned a bachelor’s or a professional degree. The great news is that many of the accredited flight-training academies like Aerosim or FlightSafety are eligible institutions for students to receive Pell grants. The amount you receive depends on several factors, including how much you can contribute financially to your training, the school’s tuition, your own financial need and more. As of this year, the maximum yearly amount you can qualify for is $5,550. You can apply for Pell grants multiple years, and the process begins by filling out a FAFSA (Free Application for Federal Student Aid), which is available at www.studentaid.ed.gov.

There are other federal grants, including the Iran and Afghanistan Service Grant, which offers $5,550 to students who had a parent or guardian who died during military service in Iraq or Afghanistan after September 11, 2001. There’s also the Federal Supplemental Educational Opportunity Grant (FSEOG) that awards up to $4,000 based on financial need. These grants are available through both college aviation programs and academies like ATP, Spartan School of Aeronautics, Kansas State University and others.

Loans have to be paid back, of course, but according to our academies and college programs, they’re an easy—if not painless—way to fund your training. Federal loan programs usually allow a grace period of six months after training is complete before they have to be repaid, allowing students to secure a job and settle into it before having to worry about repaying a large loan.

The most popular federal loan program is the Stafford Loan. Stafford Loans are low-interest loans for eligible students to help cover the cost of higher education at a four-year college or university, community college, trade, career or technical school. This requirement allows most accredited flight training academies to be eligible, just as university aviation degree programs are. As of 2010, students borrow directly from the U.S. Department of Education, and not from private lenders participating in the program.

While the basic Stafford Loan is for students with demonstrated financial need, the Stafford program also offers what are known as “direct unsubsidized loans” that don’t require financial hardship. The aggregate loan limit for undergraduate students who aren’t dependents of their parents is $57,500. Applying for a Stafford loan entails the same FAFSA form as for the other grants.

GI Bill Benefits
If you’re willing to do some military service in exchange for government funding of your flight training, the post-9/11 GI Bill is the way to go. The “classic” GI Bill that many veteran pilots used to fund their flight training in decades past has changed substantially but still offers some amazing benefits for those who have served—or had parents who served— recently in any branch of the U.S. Military. It’s important to note that the latest iteration of the GI Bill went into effect October 1, 2011, and contains some critical changes of benefit to flight students. This version is called the “Post-9/11 GI Bill.”

Like all federal programs, the nuances of the GI Bill are complex, but flight students really just need to know the basics, and these are fairly clear: If you served in the military for at least 36 months after September 11, 2001, you’re eligible for 100% of the benefits of the Post-9/11 GI Bill. The three major benefits of the Bill include up to 100% paid tuition no matter what education level you’re seeking, a monthly housing stipend and a stipend of up to $1,000 a year for books and supplies, as well as a flight-training-only reimbursement of $10,000 per year. If you served less than 36 months, you’re eligible for a percentage of these benefits, based on your time served.

Tuition and fee payments are uncapped for public colleges and universities (at the in-state resident rates). Students attending private colleges and universities have a $17,500 annual tuition-and-fee payment cap (nationwide). The most significant change for flight students is that the newest GI Bill now includes flight-training programs.

To receive these new flight-training benefits, students must have already earned their private pilot certificate and have a valid medical before beginning any other training. Students who are receiving flight training only (not in conjunction with a degree program) receive $10,000 per year to reimburse the cost of that training. Flight training-only students don’t receive a housing or book stipend. The housing stipend currently ranges from 61% to 91% of rent costs, and includes up to a third of a student’s utilities expenses.

Another variation of the GI Bill known as the “Montgomery GI Bill” will reimburse up to 60% of approved flight-training expenses. Phoenix East Aviation is one of a few training academies approved under the Montgomery Bill and also offers two “Patriot Grants,” which are designed to financially assist veterans who are training to be professional pilots.

If the fact that Uncle Sam will reimburse 100% of in-state tuition if you attend a public college with a flight-training program doesn’t impress you, maybe the dependent benefits will. There are several prerequisites and forms to fill out, but Post-9/11 GI Bill benefits can be transferred to dependents. Details of the Post-9/11 GI Bill and dependent benefits are available at www.gibill.va.gov.

Pilot Finance
Pilot Finance, Inc., was started in 1999 exclusively as a source for flight-training financing. The company has been growing in recent years and has become one of few private-training funds resources. Pilot Finance is offered through hundreds of Part 61 and Part 141 flight schools across the country, with more being added daily. Their program is based on the frequency of flight lessons a student takes during a week. More frequent lessons will save a student money with Pilot Finance in the long run.

For example, a student who takes four flight lessons per week pays a cash downpayment of $250 and commits to 30 monthly payments. The payments are based on the total cost of training for the certificate. So if the student spent a total of $8,000, they would commit to 30 payments of $323. While a student who took only one lesson per week and spent the same amount overall would commit to 72 payments of $177 per month. With finance costs, the overall savings of four lessons per week versus one amounts to over $3,000. Pilot Finance interest rates range from 9% APR to their maximum 18% APR, based on borrower qualifications. More information is available at www.pilotfinance.com.

Dedicated Credit Cards
Many of the schools we spoke with told us an increasing number of students are getting specific credit cards just to pay for flight training. Credit cards have a few advantages over traditional loans, including lengthy introductory periods with zero interest, deferred payment schedules, cash-back offers and travel points. Also, prospective pilots who may have some blemishes on their credit can apply for secured credit cards—such as those from Capital One or Orchard Bank—and be able to finance their training where no other option existed. The key to using a credit card to pay for training is to make sure you’re disciplined in paying the card off quickly, or the interest will eat you alive.

The Dean of Enrollment for the Prescott campus, Tom Rajala, says that there isn’t much innovation in funding for flight training today, but that traditional sources can still get students the ratings they need. “We also offer students the option to work part-time on campus,” she says. “We have a website dedicated just to on and off-campus jobs.” She pointed to traditional scholarships and even private loan programs to give students the funding they need. “Students should also seek out state-based aid programs,” Hanns added.

With ever-increasing fuel costs and skyrocketing insurance premiums, it’s doubtful that flight training will ever be inexpensive. But creativity is the rule when seeking financing for flight training, and the options listed here are just a beginning. If the dream to fly is alive in you, then there will always be possibilities.

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