#96 - Airplane Write-Offs, IRS Audits, and Smart Tax Planning with Ryan DeMoor

[00:00:00] Welcome back to Passive Income Pilots, everyone. Tait Duryea here with my good buddy Ryan Gibson once again. Hey, how's it going? Excellent. We're winding down the year, which I couldn't be more happy about. It's been crazy. There's a long time between December 20th and like January 2nd or something this year, so there's a lot of days off in the corporate world anyway. Yeah, it's the only time that I get a reprieve from emails.

[00:00:26] You know, it's the number one thing. You know, if you're listening to this and you're like, maybe I should not be satisfied with just being an airline pilot. I'm going to start this big company. You know, airline pilots have no idea how good they have it that they don't have to answer emails. Yeah. Like that's the number one thing for me. Right? Like look at your company email, right? Like who checks company email unless you have to or it's required or something, but you can just ignore all those emails and life goes on.

[00:00:50] I'm not encouraging you to do that, by the way. I'm just saying you can do that. But when you start your own business, you actually have to answer all those emails and then that kind of stinks. That's right. It's, you know, it's fun. It's fun. But I have to say, looking back, it's like, man, what are the biggest benefits? Wait, nobody knows how good they have it. If you've, if you're an airline pilot and you're, you've only ever been an airline pilot, it's like, man.

[00:01:10] Yeah. If you're listening to this and you were 21 and you went right to the airlines, like you have no idea. But speaking of starting your own business, getting an airplane, getting the tax right off. That's what this episode is all about. We have Ryan coming on the show from my sky. They actually do the tax efficiencies and scheduling and budgets and things like that for large corporate flight departments. And Tate's going to give the intro to that in a second.

[00:01:34] But he, he really breaks it down to somebody who just is looking to buy an aircraft and get a tax right off and all the things that go into that. And what, one thing that we really get into in the show on this one that I really like is like, this podcast is going to give you a lot of stuff to think about. But even though we always say that we're not giving any tax legal or investment advice, this just kind of what's the whistle for a conversation that you might have with a CPA to make sure you're going down the right track.

[00:02:02] And you always want to have a little bit of knowledge about everything that you go into, just because you want to make sure that you're getting the right treatment and you're following the right rules and protecting yourself against a potential audit or anything that might come up in your business.

[00:02:16] So that's what I love about this episode. You know, he's going to talk technical and specifics, but, but this is a good primer for if you're thinking about buying an aircraft, you're thinking about having a flight department, you're thinking about any investment in the aviation at all, all the tax stuff that goes behind it. Ryan really covers really well. So Tate, who is this guy? Yeah. Ryan DeMoor is, he's not only the chair of the NBAA tax committee, but he's also the head of aviation tax for MySky, which is a Swiss based company.

[00:02:44] Uh, he's based here in the U S uh, and he is a aviation tax and aviation finance expert. So knows a lot about aviation tax. And, you know, even if you're not going out and buying an airplane, listen to this episode, because we, we unpack a lot of relatable things when it comes to IRS audits, record keeping, you know, lots of things that if you're, if you're going to be investing in real estate, if you're going for rep status,

[00:03:14] if you're going for a short-term rental loophole, we talk a lot about how the IRS views things and the records that you need to keep. And they're going to be the lessons in this episode are applicable, not only in aviation, but in all facets when it comes to taxation. So I love this stuff. And, and I think the listeners will get a lot out of it. Let's get to the show.

[00:03:38] Welcome to passive income pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators. We interview world renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll.

[00:03:57] Ryan, thanks for coming to the show. I'm excited to jump into all things aviation, tax, owning airplanes, setting up flight departments, doing things that are tax efficient. And you're the expert on that. So, so welcome. Thanks guys. Appreciate the time today. Why don't you just tell us a little bit about yourself and the company you work for, the company you represent and kind of what you do to help aviators?

[00:04:20] Sure. Uh, actually I'm a former pilot. I flew for 10 years. So, uh, kind of, you know, super familiar on the, on the flying side of things, but then got very interested in the finance and tax side of it. And, uh, uh, worked on a, at a one 35 company for a while, sort of in their financial department. And then, uh, at a 91 flight department, uh, as their financial analyst. And that's kind of where I learned cut, sort of cut my teeth on how, how to do all of this stuff. And, uh, so presently I work for a company called MySky.

[00:04:49] What MySky does is, uh, we have a suite of financial products for corporate flight departments and charter departments. So we do a spend management, quoting, budgeting, my area, which is tax, uh, and then procurement as well. And so those are kind of the areas that we, that we realized there, there was a gap in the market, uh, as far as on the corporate flight department side, um, that maybe ERP systems out there were covering larger industries and, you know, aviation departments were kind of,

[00:05:19] you know, 753 on their list. So, but at the same time, those departments, it's good to have that level of data and that quality of data. And so we created a full suite of, uh, uh, financial products for corporate flight departments. What's an ERP? Uh, ERP systems are, are the accounting systems that, uh, big companies use to, to track everything. Uh, so enterprise resource software is what, uh,

[00:05:45] perfect. Thank you. Uh, what, what is generally, uh, referred to as such. So yeah, SAP, Oracle, NetSuite, those kinds of things. Uh, that's an ERP system. So excellent. Well, yeah, that's what, that's what MySky does is we kind of marry the operating data and the financial data, uh, together for companies so that a lot of deeper analytics can be done. Uh, but that's also helpful sort of on the tax side and making sure that, you know, everything is being handled on the tax side as well.

[00:06:14] There's a lot of airline pilots out there now that are looking to buy aircraft and do it in the most tax efficient way. Yep. How the heck do we do that? So that's, that, that's the fun part, right? So we're going to get to, uh, sort of understanding that, uh, the, the way the tax code is written, uh, in the United States, it certainly incentivizes, uh, having a business. And so that's kind of the point, right? Is we want to make sure that if we can utilize that aircraft, uh, as small as that percentage might be for business.

[00:06:44] And there's some limits of course, but at that point in time, we can actually get a pretty sizable deduction personally and or corporately, right? I mean, the rules are basically the same. So it's whether I'm a fortune 500 company or fortune 100 company, or whether I'm, you know, Joe Schmo LLC, uh, right. The rules are basically the same. So if I have a business or, you know, so if I'm a pilot, I'm flying, I maybe have a side hustle.

[00:07:10] I want to buy an airplane at that point in time, you know, can I put it in a business and, and actually use it for that business in a way that makes sense. And we'll get into some of those, those rules and so on, and how we sort of pass through certain gates to make sure that, you know, everything's on the, uh, up and up. Cause we don't want to trip that off. Uh, but you know, the point there is, is that if I can do that and I have that ability, then there's a significant tax savings that are associated.

[00:07:38] Right. So again, it's very similar to, uh, you and I buying a car, right? So if I go buy a car and I just use it myself personally, I don't get any deduction for that on my taxes. Right. There's nothing, there's nothing that happens there. I just utilize my vehicle in the same way.

[00:07:55] If I do have a business and I do have an LLC and I go buy a car, there are certain, you know, sizes of vehicles that the IRS is, uh, favoring at this point in time that allows for things like bonus depreciation and better deductions. And that goes into the concept of tax depreciation. And so that's kind of the goal is to get it in a business so that I'm able to then deduct the cost of that asset either right away or over time.

[00:08:25] Can you give us a couple of examples of how someone might use an airplane in their business? So I'm, I'm an airline pilot. I want to buy a Cessna and give me a few fun examples of, uh, just to, to get my ideas flowing of how I could use that as a business asset other than running drugs.

[00:08:45] Right. And so, uh, you know, no way, right. That's, that's, that's the one you want to stay away from. I'll tell you that right now. The DEA has a few ways of handling that one with the IRS, but.

[00:08:58] So a couple of good ideas, right. It, depending on what my side hustle is, uh, if I have one is look oftentimes these days, buying and reselling goods, uh, you know, and playing an arbitrage game in, in that market is something that a lot of people do. Right. You know, my wife, she loves Christmas villages, right? So she buys Christmas village stuff, but then she also sells it in antique markets. Well, that's a business, right?

[00:09:24] Right. So can I say, Hey, you know, we, we need to go take the airplane and go fly for two hours to go find an estate sale to go find that stuff. Okay, sure. Let's go do that. Right.

[00:09:35] Right. No, I don't own one, but if, if I did, that's what I would be saying. Right. Is, is essentially, you know, those types of activities. Right. So if I'm, uh, searching around to buy things or, or get inventory or, you know, do whatever it may be, maybe I happen to be, um, you know, a former doctor or former, uh, dentist or something of that nature. Right. Where I still have a practice, but maybe I switched careers.

[00:10:01] And I'm now an airline pilot because that's really what my dream was. Well, if I still have a couple offices that are around, right. Traveling between those offices, this is sort of where we get to our first gate. Right. So. And what about, uh, if you're very conveniently in real estate and you're looking for property in places, uh, that's a very convenient one.

[00:10:22] Absolutely. Right. Uh, and so that's definitely one that, that, that is a big deal that if I want to go look at, uh, real property locations, um, and I'm flying my airplane to go see those, then perfect. Right. That can be written off as a business expense for my LLC. Right. And that's kind of the first test and that first gate. Right. And we call this IRC 162 or internal revenue code 162,

[00:10:48] which is ordinary and necessary. Okay. And that's the first part. So, uh, I have to essentially say this expense is ordinary and necessary for my business. Let's talk about that because I think this is something that for newer business owners gets muddled a lot of the time. You know, they start to just think like, Oh, I can write off everything. It's like, eh. So I'll put the example down. Right. And, and I'll go to the absolute extreme to, to highlight the example.

[00:11:18] And so basically I'll say, look, if I, if I own two dentist offices, right. And I'm, you know, they're an hour away, uh, from each other by car. And I buy a 172 and I fly between the two of them. Right. I would consider that to be ordinary and necessary. If I happen to be extraordinarily wealthy and in the same situation, and I buy a G650 to fly between those two, that $70 million probably is not going to be considered ordinary and necessary.

[00:11:46] One does not use a G650 to do 30 minute flights typically, unless you're Phil Mickelson, but that's another story. Right. So, but the point there is, um, the point there is, is, is what a rational human being look at that and go, does this make sense for the given activity? Right.

[00:12:08] And so if I'm flying to real estate deals within an hour or two, if I'm buying an SR22, if I'm buying, right. Uh, a V-tail Bonanza, if I'm buying something along those lines, a TBM, even maybe, you know, maybe I do some business dealings offshore and I'm in Florida and I buy a caravan on floats or, or something along those lines. Right.

[00:12:29] Is that, is it rational? Does it make sense? Or am I buying too much airplane and I'm going to try to deduct too much? Right. If, if my company, if my side hustle is making $20,000 and I buy a $2 million airplane, the IRS is probably going to go, eh, no. Um, right. If I'm making a million and I buy a $400,000 airplane, the IRS might go, okay, fine. That's the, you know, that seems to be acceptable.

[00:12:58] There's no real standard of, Hey, it has to be X percent of exactly. But at the same time, it would be, you know, if I look at it, can I, I always joke in my industry, right. As, as far as sitting across from an auditor, can I keep a straight face? And if I can keep a straight face when I'm talking to an auditor, then probably it's going to be okay.

[00:13:20] A lot like justifying, uh, you know, we say this all the time in, in flying. It's like, you know, Hey, can you, can you justify yourself to the board? Right. The FAA. Yeah. Yeah. It's a good analogy. Or if you get a carpet dance on Monday when, you know, in the cheap buy at office, can you justify yourself? It makes a lot of sense. So do I have to use the airplane for the business all the time?

[00:13:43] Um, no. And so that's kind of the next, the next step that we get into. And so there's, there's a couple of different things that we can go through and test out. And there's sort of traditional structures and non-traditional structures that exist in how you sort of structure your ownership. But in a more traditional structure, uh, you would say, you know, I certainly don't have to use the aircraft a hundred percent for business.

[00:14:09] Now there are penalties that are not necessarily penalties, but there is what we call the loss of deduction, uh, that occurs on an aircraft and on the asset when I use it for entertainment reasons. And so if I'm just taking it for the weekend and going somewhere, uh, with my wife and kids or whatever, right. I wouldn't call that business. It would certainly be entertainment. So I lose the deduction part of that.

[00:14:35] And so there's a big calculation and we actually do this on the corporate side as well, because for corporate entities that utilize, you know, large flight departments that utilize large aircraft, they are similarly losing the deduction for the entertainment use of the aircraft.

[00:14:51] So if the CEO goes on vacation on the corporate airplane, the company does not get the deductible. So in the same way, if you own an aircraft within a business, if you're utilizing that, there is actually four different ways that the IRS lets you calculate that under the disallowance.

[00:15:07] And so there's C miles, C hours, flight by flight miles and flight by flight hours. So it's either hours or miles and then a method, but you would typically have to go through that calculation, uh, on a yearly basis to say, Hey, ultimately what percent of my flights are for business reasons? And what percent are for entertainment reasons?

[00:15:27] And at that point, that percentage, you lose that entertainment percentage as a deduction. So if you have say, you know, 25, 30% of your, your flying is now personal in nature or entertainment in nature, then that the cost of everything that you've spent on that aircraft that year that you're trying to deduct is now cut down by that percentage to say, Hey, you know, only the business portion is deductible.

[00:15:54] What if it's not as cut and dry. What if, you know, okay, I'm going out by myself. I'm looking at this real estate deal and then I fly it back. And then, and then the next week I fly my wife and kids out to go on vacation. That's very black and white. This one's deductible. This one's not. What if my wife and kids come with me to go look at the real estate?

[00:16:17] And so you start getting into substantiation of, of, of the primary purpose of the actual trip itself. Right. And so you start looking at, well, you would be considered business potentially. Right. Uh, but if there's three people on that airplane, the other two are not going to be considered business. And that calculation actually happens at the seat level, not at the leg level.

[00:16:39] And so, you know, they would be considered entertainment. You might be considered business, but then, uh, effectively one third of the flight would be deductible. And the other two thirds would not be interesting.

[00:16:50] Simple way of putting it, but, um, because it happens at the seat level. And this is exactly why the IRS should calculate it four different ways is because there are differences that occur in, in sort of that segment in the way those, whether there's, you know, all business passengers or some business, some personal and the way that all occurs, but it would be done and needing to be looked at at the seat level itself.

[00:17:13] Yeah. Does your company help individual business aircraft owners or is it mostly just flight departments, ERPs? So individual business owners, we do get in, you know, definitely I'll, I'll, I'll put it this way. Anyone who has an aircraft with a management company. So the, my sky actually started out as an auditing company in Europe. So we're a Swiss based company and it started out actually auditing management companies in Europe. Uh, so we were on the owner side.

[00:17:43] And so we do still have a lot of family offices, a lot of, uh, you know, now typically speaking, we're not down in the, you know, uh, less than a million dollar range as far as asset value. You know, typically it's, it is, you know, corporate flight department style aircraft that we deal with, but at the same time, that's kind of the point.

[00:18:03] So we do have products that work very well in the family office vein. We do have products that work very well for the corporate flight departments and we do have products that work very well in the charter market. So any of those three, I mean, the idea is right. If we can kind of cover all of them with a specific products, right?

[00:18:21] So our quoting platform is extraordinarily accurate. That works really well in the charter market. Seeing a predictive P and L in the charter market is, is very important. So, uh, you know, our quoting a software can do that and is very good with that. Our spend management software, uh, which is sort of the accounting software, you know, is great on either the 91 side or the 135 side. But yeah. So as far as family office versus a company, we do a little bit of, of everything.

[00:18:49] Well, amazing that we can learn from you. And I'm sure there are a few listeners that, uh, might be able to key into your services. So if I'm an airline pilot, I own this airplane and I'm bringing friends or family along on this trip and I got to break out seats. I'm sure that, that anything from a really detailed notepad or an Excel file all the way up to an app that tracks this for you would suffice from the IRS perspective, right? As long as you have detailed records, right? Am I misguided there? No, you're not. However,

[00:19:20] And I will say historically it was a lot more lax, uh, in the past. And so that was kind of the, uh, you know, if you could produce a few records to be like, yeah, sure. Here it is. Right.

[00:19:31] Typically speaking, most audits, airplanes weren't the focus of the audit to begin. Uh, and I'll phrase it that way. And I'll say basically, right. They would audit high net worth individuals or, or individuals that, you know, if there was any type of aviation themed stuff on their, uh, tax return, they might say, Hey, we're going to go audit this person as a, in total. Uh, and then it was kind of like the airplane was just there and they were like, eh, let's ask a few questions about it and let's go from there.

[00:20:00] Well, that kind of changed at the beginning of this year. So in, in February of 2021, the service actually came out and said, Hey, if you have an aircraft, we're coming after you. And that was effectively what they, what they said in their press release, but they actually issued a press release saying aircraft owners, uh, we're going to be looking at you.

[00:20:25] So the inflation reduction act was essentially where, where they got the funding to be able to pay for all of these additional, you know, IRS, uh, agents that are going to come in and specialize in this stuff. So, you know, they, they essentially said we're going to do about 30 or 40 audits. And this is of course, you know, much more focused in the corporate world on the high dollar values, but there's obviously going to be an effect all the way through.

[00:20:48] And so they're done probably about 30 audits. So historically, when you get audited by the IRS as a company, you get what's called an IDR or a individual data request, right? So you get a data request or an informational data request. So you get a data request from the IRS that says, Hey, you have to show us ABCDEFG. Right. And so you go, okay, cool.

[00:21:09] So historically you had a certain timetable to be able to, to comply with that IDR. And, and so again, it was typically, you know, Hey, uh, where did you fly and who's on board and what was their purpose? And that was really what they asked for. Uh, and then they'd look at it and go, Oh, okay. All right. We got it. Uh, everything's fine. And, and, and you're good to go.

[00:21:30] So as of February in these new audits, uh, we've seen now starting to trickle in the new IDRs. And there's probably about 25 different questions on each IDR, uh, that relates specifically to aircraft. And so it is an aircraft specific audit. It is not an audit that is kicked off on some other thing.

[00:21:52] And then drags the airplane into it. It is actually the IRS is targeting individuals or companies that have aircraft and going specifically after those aircraft and auditing that to say, Hey, is it right? Is this business use? Is this, you know, all of these other things that then might be able to get the money. So what they're going to do is about 30 or 40 of these.

[00:22:15] They're going to look at the analytics and say, is it worth our time as the IRS to chase after this? And if so, they're basically going to launch a full scale attack as we see it and launch thousands of audits into, into aircraft. So to answer your question, I know it's a really long answer, but to answer your question, yeah, it's real though.

[00:22:38] And so to answer your question, the real issue is the more detailed and the better records you keep, the more that you're going to be okay. Right. If you're writing down who's on board your aircraft, why they're there, what the reason is, if you have backup documentation, right? I, I don't need the backup documentation for the personal trip. And that seems kind of counterintuitive. You would think you'd need it for the personal trip, but you actually need it for the business trip.

[00:23:04] You need to be able to prove that you had business, right? So if I do, you know, if I go fly, you know, somewhere and I say, Hey, look, I'm going to go do, look at real estate, right? Well, if I go look at real estate for 10 minutes and then I spend two weeks somewhere, uh, and that happens to be, I don't know, uh, you know, uh, a beach location in California, they're going to go. Yeah, no, that wasn't, you know, you can't call that business for you. Right.

[00:23:33] And so that's the kind of stuff they're looking for is to be able to say, Hey, so, you know, being sort of saying, look, I had two meetings this day. I went and looked at these three properties the next day. I went and looked at those three properties the next day. Then I had lunch with this person, this person, and right. This is why that matters. And so on. Having those kinds of records to substantiate the business flying is critically important.

[00:23:57] So that if you do get audited, you can produce those and say, Hey, I am entitled to these deductions. This is great. And this is kind of a theme and everything that we're doing tax related, right? Like if you're trying to become a real estate professional or trying to do any deduction, like the more records that you keep, the better off you're going to be, because if that audit comes and it's going to come at the worst time when so many things are coming on, you're going to, you're going to, you're going to want to have those records.

[00:24:23] And so I think that's not dissimilar to anything that we do. And, you know, as pilots, we, well, some of us keep a logbook still. So it's kind of like the same thing. Just like a logbook, you know, when you're, when you're flying in the airplane. So that's great. Yeah. I stopped logging 12 years ago. I was going to say, I kept my electronic one for the last couple of years when I was flying for the, so Trump owns a 757. Do you see any of this being walked back under the next administration?

[00:24:51] So that's a really good question. And, and, and, you know, I think the answer to that question is we'll see. We're hopeful that with the new administration, that, that there's going to be a lot of policy changes that occur. So there was a lot of stuff that happened under TCJA or the tax cut and jobs act that is set to expire obviously in 2025 or 2026 that hopefully they extend.

[00:25:17] There are other things that exist and, and I'll, I'll put it this way, right? Bonus appreciation. That's sort of the first thing that everybody kind of goes to is, are we going to get bonus back? Right. And, and, and it's a big deal. And, and, you know, I'll kind of cover that separately in a bit, as far as how that sort of plays with, with that airplane.

[00:25:36] Cause that goes back to another percentage piece where look, you have to ask to be able to claim that as a deduction, you actually have to use the aircraft at a bare minimum at 25% qualified business use. And then from that point, you know, forward. So if I don't get 25% qualified business use that I'm not able to take bonus on that aircraft. That's huge. Yeah.

[00:26:00] That's a huge rule, right. That, that you should know, like, yeah. Cause if you're going to put the, if you're going to buy an airplane and expect a write-off, I mean, I would imagine that a majority of your write-off is going to be when you buy the airplane for a million bucks or whatever. And then you're going to get that huge tax write-off right out of the gate. But if you don't hit that 25% usage for your business, you forgo all of that. Correct. So if you're listening to this, like that is massively important. Hugely.

[00:26:27] And then to go forward, I don't know how they would unwind that, but at least in the first year, make sure that the 25% you hit, cause that's, that's, that's a lot of tax write-offs. In every year. I'll say it is in every year going forward. And this is probably the right time to talk about it since it got brought out. But yeah. And by the way, our listeners are familiar with bonus and if they aren't, they can go back and listen to other episodes we can reference.

[00:26:49] I assume so. And so what we're talking about here is the two ADF rules. And so the two ADF rules normally say 50% of the, there is a special cutout for aircraft under the two ADF rules that basically say it goes down to 25. And you actually have two parts to that test, but there's a 25% test and a 50% test, but number one, right? So obviously whether it's five years or six years, whether you're using makers or straight line to get bonus, you're using makers, right?

[00:27:17] So if you're just taking the deduction on a straight line basis, you don't have to worry about it. If you're taking makers and then taking the, taking the bonus, right? Each consecutive year, you need to meet that test. And if you don't, you say, how do they unwind it? Well, it's called recapture. So in other words, if you then took that million dollars, right? So you buy an airplane for a million dollars. If you, if, you know, supposing a hundred percent bonus was there, I get to take the full million dollars as a deduction in that first year.

[00:27:45] It turns out in the second year, I mess it up. I go under that 25%. Well, they're going to look at what the makers table would have said you still owe. So let's say that's 700,000, right? Cause it's 21% in the first year, plus whatever it is in the second year. I think it's, I think it's actually 32. So they would take that 68% and they'd give it back to you as income and go, now you're paying taxes on it.

[00:28:08] And so the following year you would recapture that 68%. So $680,000 now would be considered income and you'd have to pay taxes. Not good. Don't screw this up. Okay. So if you're going to buy an airplane and you think that you need, you're going to take a deduction, make sure you're going to do it every year or surprise, you're going to get a huge tax recapture. That's like really critical to know. And keep in mind, everybody likes to buy airplanes in the fourth quarter for obvious reasons. That is a calendar year test.

[00:28:38] So if I buy my airplane on December 30th and I take one flight and it happens to be a personal flight because nobody travels for personal reasons in December, right? Um, and I'm kidding. That's a joke. Uh, right. If that one flight happens to be personal, well, guess what? You had a hundred percent personal usage and you get zero. Oh man, you blew up your bonus. You blew up your bonus. Yeah. So don't do that. Don't be that guy.

[00:29:04] I have a number of horror stories on the corporate side where people have lost $70 million because of that. That's a hit. Ryan, can you talk about some of the changes that might be coming in taxes and that relates to aviation and how maybe the new administration might have some new impacts on upcoming regulation? Yeah, uh, certainly. And, and, you know, we talked about bonus and that obviously is sort of the big, the big one.

[00:29:29] And in the same vein, you know, we've talked about it before, but we've certainly, uh, are going to attempt if we can't get bonus to at least try to get 1031s back. And so, but a lot of listeners might not know that prior to the tax cut jobs act, 1031s were actually allowed on aircraft. And so. I gotta be honest. I didn't realize that so that you could 1031 exchange into other aircraft, but now you can't. Correct. Really?

[00:29:53] That actually changed in the tax cut jobs act. So, uh, there was an entire cottage industry actually around doing 1031s for aircraft. You could do a forward or reverse exchange. Interesting. And you had the same 180 days and everything worked exactly the same as it does in real estate. Only it worked for airplanes. It worked in art too. Got taken away from the art world too. Oh, interesting. No, it actually works the same way. So it'd have to be investment aircraft, right? Like you'd have to have it into a business purpose, right?

[00:30:20] Correct. It needed to be in business. But as we talked about, right, that's the whole point is put one into business. And then, so there there's corporations out there that probably did not pay taxes on the gain on the sale of an aircraft for the last 80 years. Wow.

[00:30:32] Because they would just roll from one to the next, to the next, to the next, right? Now with bonus, the math works out the same, right? It really does. If I sell one in the same year as I buy it, right? The, the, it, it, the gain on sale of the one I sell is going to offset the purchase of the next one, which is what a 1031 did. I always call it the lazy man's 1031 in real estate. Correct. Yeah.

[00:30:55] And that's exactly what it is, right? With, with bonus, it is a lazy man's 1031. Now that said, the struggle there is having to close in the same year. So if it doesn't quite line up in the same year, you have a problem. So the biggest difference between real estate though, and an aircraft though, is that, that depreciation. Bingo. So the real estate, some of the depreciation is excluded from that short-term bonus depreciation you'd get. Cause it's, the building gets put into its 39 year, 27 and a half year life.

[00:31:23] And an aircraft though, I would say it's not a poor man's 1031. I get what you're, I get your point, Tate, but like it's, you get the whole thing. Cause the whole aircraft is depreciable. So that's pretty cool. Well, right. It's all less than 20 year lifespan. No, I was just going to say that, that although, you know, real estate tends to appreciate in value art tends to appreciate, whereas aircraft tend to depreciate. So there's not going to be a very often situation where you have an aircraft unless it's coded times that, that is worth more than what you paid for it. Yeah. That's, that's a good point.

[00:31:51] So the trade-off there, and it was actually the new administration who actually got rid of 1031s for airplanes. That was a trade-off that they did the last time they were in office with Tax Cut and Jobs Act. And that basically bargained used aircraft into a bonus. That's actually what ended up happening. So the reason why used aircraft are now allowed to take bonus is because they traded out the ability to do 1031s for airplanes for that. Interesting.

[00:32:19] Well, this is interesting because, you know, real estate professionals lobbying groups are going to be lobbying for depreciation and bonus depreciation to come back and be restored to 100%. But even the aircraft industry, the NBAA organization or AOPA who go to Capitol Hill and lobby for tax change. So they're getting hit from multiple ways on this, right? Oh, yeah. Well, and you look at large corporations like John Deere and farm equipment and all these other, right? That was the point of bonus, right?

[00:32:47] If you go back and look at the history of bonus, the bonus came into play in 2001 post 9-11, right? That was the point was to spur the economy was to say, look, we, you know, that's when it was 50%. And then in the financial crisis of 2008, they said, hey, we really need to bump this up to 100% to really get the economy revving again. And that was the point was to take those huge manufacturers and give them an incentive to actually start producing a lot.

[00:33:15] And so that's kind of what drove the whole thing. So that's the point there is, is, yeah, whether we can get bonus back or whether we can get 1031s, right? That's going to be, it's going to help the OEMs. It's going to help individual users. It makes jobs. Yeah, exactly. Like at the end of the day, they don't just make these tax cuts for, you know, rich people to get richer. They make tax cuts to spur economic activity and to create jobs and to incentivize people. And then people pay more income tax. Yeah. I mean, think about it.

[00:33:45] Like if I'm going to go buy a Gulfstream, how many jobs is that going to create? How much employment is that going to create? And so there's an incentive for these companies to buy a new aircraft every year because they're going to get the tax break. And guess what? That makes a new aircraft be built every year. That employs lots of people. And so it aligns the incentive for companies and for small individual owners of aircraft to have that activity and to use their aircraft for a business purpose. So it creates jobs. So it's great.

[00:34:11] And at that point, too, I mean, I know this, you know, random stat of the day, but and I don't know if this is still actually the case. But at one point in time, the second largest export of the United States of America was aircraft. Wow. It's a lot of jobs. Powerhouse. Yeah. I know you're dying to ask the next question. So go ahead. OK, I want to bring up a different strategy that we've talked about on the show before, because we've talked about doing something different where you buy an airplane. You put it into a lease pool.

[00:34:38] And so the airplane is is 100 percent business use. And then you lease it back for personal use and you pay the going market rate. Yes. Let's break down the differences between these two strategies, because that was on a previous episode. You know, you own the airplane, but now you're having to pay to use it. You're paying yourself, your own company. This is more saying, hey, I have a business. I don't need to put it in a lease pool. I have a different business that requires the use of this aircraft.

[00:35:07] And I'm taking it into my business and I'm using it at least 25 percent of the time for business use. Correct. And so this is where we start getting into what we call passive rules in the IRS. And you guys, I'm sure, are familiar with passive income and how those rules work and so on. And so the question becomes, are you an active user, right? Or are you a passive user?

[00:35:33] And so how do those entities roll up into groupings as far as from a taxation standpoint and so on? So there's a lot of similar concepts that apply, you know, larger airplanes, companies and how all of that works. And when you get to the idea of a management company and sort of saying, hey, look, I'm going to put my airplane with a management company and then charter it out. Right. It's the same thing. It's just you guys are doing a smaller skit. Right. And so the concept is very similar.

[00:36:02] Well, let's break this down because we talk a lot about passive versus active in real estate and what you can, you know, you invest in a self-storage deal or a multifamily deal or, you know, and you get that K1 that shows a $30,000 loss. Yes. Well, but you can't use it against your W-2 because it's a passive loss because you're not actively involved in the trade or business.

[00:36:26] Even if you go out and you buy a physical piece of real estate and you work on it, but you put long-term tenants in it, you still can't take it against your W-2 because it's a passive activity from the IRS rules. But if you, there's a loophole where if it's a short-term rental, you can. So let's talk about it with an airplane. You put that airplane into a lease pool. It's being used either to flight school or to rent out like to guys like Ryan that want to fly it up the Cascades on the weekend.

[00:36:52] How involved do you have to be in that charter pool in order to take it against your W-2? Quite. And I'll put it that way. And so there's about a 10-part test that the IRS will use in that particular situation, right? And so it's how many hours per year are you putting on this? How many, you know, and I don't remember them all off the top of my head, so don't quote me on this.

[00:37:17] And I will also say, you know, I'm neither officially an accountant nor a lawyer, so don't take this as professional tax advice and, you know, seek your own counsel. Good disclaimer. We pretty much say that on every show, but that's good. Yeah, right. But of course, that particular piece of it, right? I would say the hurdle historically has been pretty high as far as on the airplane side as to what you need to be involved with.

[00:37:45] And it's like, you know, a significant amount of time needs to be dedicated to it. A significant amount of use needs to be dedicated to it. And then, of course, how they're grouped, right? So if you have passive income and then you have passive losses that you can offset against, great, right? Then let's talk about that as a strategy. If you do not have passive income to offset against those passive losses, you know, is it worth it? Probably not, right?

[00:38:14] So it really just depends on your individual, like, do you have passive gains that you can utilize and that you can offset? Awesome. Within that business. So again, it really goes back to, right, hey, what am I doing in that business? And what is the structure of that underlying? And that's why I say go check with your own tax professional because they're going to have sort of the answer as to, you know, what you can do that might be able to sort of help in that situation. Quick plug for passive income pilots. I say this all the time.

[00:38:44] Throw money over the fence and build your passive income streams because those are the ones that are easy to offset. Exactly. Well, and I also want to say too, like, I know we say no tax legal or investment advice on the show. This is just friendly conversation because if you're sitting down with a CPA and you have a rental aircraft that you've put into a pool and you say, hey, you know, I listened to this podcast and, you know, these guys were talking about how to make this a tax write-off and your CPA says, yeah, you can't do that. Right. Right.

[00:39:12] Now you can ask, like, a better question, which is like, well, I heard there's a 10-part test that the IRS puts out there that if I follow that, then I will be able to do this. Right. And then, you know, so do you know about that 10-part test? Yes. And that's like where you would, like, the IRS would probably put out some kind of publication because they do this in real estate as well. Like, for 1031 exchanges as an example, they do a tenant in common. There's a revenue ruling and there's all these clarifications that the IRS puts out.

[00:39:39] Or if, you know, you're sitting down with that same CPA and you say, hey, I'm going to put this in and I want to take losses. And they say, oh, yeah, no problem, you know, and then just be like, okay, well, what is the things that I need to make sure that I'm doing? Like, these are good questions to ask because here's the thing, guys. CPAs have, like, they give you a comfort blanket and you think you're protected from an audit because you hire a CPA or whatever. They will disappear, like, on you faster. They will assume no liability when you get audited or anything like that.

[00:40:08] Yeah, there's no protection, right? So, like, the onus is kind of on you, the taxpayer, to make sure that you're kind of following the rules. So, just, I know this applies to everything you do. Like, you should always be somewhat aware of what you're doing and kind of what's going on out there and get your own clarifications and kind of know. Absolutely. Yeah, I mean, you can surround yourself with experts, but just make sure that you're actually doing the thing that you're kind of doing more digging than just, oh, yeah, it'll be fine, you know, because that person will be gone. Thank you for saying that, Ryan. Yeah. Absolutely.

[00:40:38] No, and I'll take it a step further, right? If you're going to go down this road, don't just get a CPA. Get a CPA who understands airplane rules. Because, and there are a number of them out there in this country that specialize in just this, right? And so, your, you know, corner store CPA, and no offense to them, they do a great job, but your generalist isn't going to know these rules, right? And so, they might go look them up. And again, the passive activity rules are in IRC 469, right?

[00:41:06] So, you go, okay, fine, I'm going to go read 469. But do I really know how to apply that to this situation? Maybe I don't, maybe I do, right? Now, that said, if you say, look, we have a, you know, I bought a $3 million airplane or I go buy a, you know, a Citation M2 or some, you know, a Mustang or whatever, right? If I'm starting to get into that range, the dollar amounts are worth it to basically say, hey, look, I want to go find someone who does this for a living, right?

[00:41:36] And absolutely focuses on these specific areas. And then go have that conversation with them before I buy the airplane, not after I buy the airplane. What I love about these conversations, though, is it's enabling anybody listening to this show to have an intelligent conversation. Because that person doesn't have seven hours to sit down with you and educate you about this stuff. Right. You have to come to the table with some sort of knowledge. Correct. I mean, you do, but you're paying them for it, right?

[00:42:07] Yeah. Yeah. Like 500 bucks an hour or whatever it is, right? Yeah. And I mean, that's like, I mean, you know, people, you know, hey, do you know a good attorney for this or, you know, know a good attorney for that? Attorneys are the same way. Like every attorney is going to specialize in something specific and in a specific area. I mean, we have dozens and dozens of attorneys that we consult with because there's dozens and dozens of reasons to have specialties in each thing. Right. So same thing in tax.

[00:42:31] I mean, you're going to have, you know, this is, it'd be prepared to spend a few, you know, a few thousand dollars, maybe even $10,000. If you're going to buy a multimillion dollar aircraft and expect to get some, you know, get hundreds of thousands of dollars of deductions. Like you want an expert that is going to put you in a defendable position if you get an audit. And, you know, it's really important. That's not where you want to go cheap. You want to go good with, with an excellent person. Exactly. Having a team ahead of the purchase is critical, right? You want to bounce these ideas off before you go buy an airplane.

[00:43:00] And so I'm, I'm the chair of the NBAA tax committee. So the national business aircraft association has a tax committee. And so I'm the chair of the tax committee. So I, like you said, the vast majority of the 30 members on that tax committee are either aviation lawyers or aviation accountants. Right. And so there are a large number of specialists out there who deal specifically with these areas and they deal with it day in and day out. And that's the only thing they deal with. And that's all they ever deal with.

[00:43:29] So you're, you know, you're going to come into a situation if you get ahold of one of those individuals and you basically say, Hey, right. I'm thinking about X, right. They're just going to tell you, no, just stop talking. It's not a good idea. Just go, go away. Or they're going to go, Hey, this is great. Yeah, no. And by the way, I should probably have somebody from NBAA on at some point, but that's another point that you bring up, you know? So there's associations that, I mean, we've had a chief economist from the A4A on our show.

[00:43:57] You know, obviously we, we, as pilots know, airline pilot association. So there's associations that lobby and represent your interests as business owners of aircraft. And so the NBAA, I'm sure is just packed full of resources. So join that association, go to one of their, I used to go to the NBAA conference. I used to go to the NBAA conferences actually in a different capacity when I was a consultant, but, you know, and that's a good place to, to hang out and meet other people who, who have good recommendations on packs, preparers, et cetera. Absolutely.

[00:44:26] And I'll, I'll bring up AOPA as well. AOPA has a lot of resources around that for aircraft owners, right? So there's a ton of resources that are available. You're not the only one who's ever done this in other words. No, correct. Yeah. All right. So I'm an airline pilot and I want to know why I care about writing off an airplane. Give me an example of the most insane tax write-off you've ever seen from an aircraft purchase.

[00:44:54] Um, uh, well, we'll, we'll put it this way. And it's not, I mean, from a percentage standpoint, it's not really that insane, but, uh, you know, I've seen a corporate flight department that within one year has, uh, when a hundred percent bonus depreciation was going on. That replaced four Gulfstreams in one year and also replace that two helicopters.

[00:45:17] Uh, and so that ended up being somewhere in the neighborhood of a half billion dollars that that was basically that they were able to offset against their income. So now again, granted that, you know, is a half billion dollars that much to a fortune 50 company? Yeah, probably. But at the same time, right, a half billion dollars is a big number. Uh, so yeah, that's, uh. And the same thing can be done by someone who owns a Cessna 152, you know, uh, on a smaller level.

[00:45:47] It's the same concept. Just, I mean, the rules do change a little bit as you get, you know, sort of further down and there's other areas of expensing like, uh, you know, section 179 that has limitations and so on that, that, you know, I'm just not going to get into today. But, um, you know, so there's, there's definitely different, slightly different rules, but the general concept remains the same, right?

[00:46:09] If I have a business and I, you know, and if bonuses is, is going to stay right, then, then I get big giant deduction potentially, uh, which can be super helpful in the realm of, you know, whether I'm. Uh, if I have a side hustle as an airline pilot that's earning a significant amount of money or if I have, you know, passive, uh, type. Things that I'm, I'm working on structuring and setting up, um, right.

[00:46:36] If I'm actively involved in that business, uh, and, and utilizing my own aircraft to do that, then, Hey, if I can take even part of that, right. 30, 40% of that and deduct it. Awesome. Right. That's a huge difference than just simply saying, no, I'm not going to take any of those subductions. It's absolutely available. Why not take them? Well, Ryan, this has been tremendously, uh, impactful to our listeners. Um, I see you, you're, you're really, uh, pretty active on LinkedIn and you guys go to a lot of trade shows.

[00:47:06] Do you have any recommendations on where someone should go and, and kind of wrap their head around like aircraft ownership, setting up a flight department, you know, kind of where you guys hang out to kind of learn more about what you do. Sure. What shows would you go to? Uh, so we, we typically will go, like you said earlier that NBAA, right. It's the national business aircraft association is, is huge show in Vegas yearly. And by the way, that show is always wildly entertaining. Like the, the booth setups are incredible.

[00:47:36] Like there was somebody on a trapeze one year. Like it's like wild. So think if I recall correctly and go call me on this, but I think actually it is the fifth largest conference in the country. Like CES is number one, right? So consumer electronic show is number one, but I think NBAA is like the fifth largest. Uh, it's, it's up there. I mean, it's, it's huge. And so there's, there's all the stops get pulled out. So, uh, now, uh, you know, post COVID, it has shrunk a little bit and, and so on.

[00:48:04] So that might be pre COVID numbers, but there's definitely, that is, uh, highly advisable. But then, like I said, AOPA is another area that they do a lot of seminars. They do a lot of things that, that kind of deal with this. So look for news hours, uh, that, that come out.

[00:48:22] Um, so corporate jet investor, uh, not sure if you guys are familiar with, with CGI or corporate jet investor, but that's another, uh, website that puts a lot of news out there as far as the industry. And so they do track a lot of things like SAF and, um, you know, all kinds of stuff that, that sort of are relevant to, you know, UAS and, and AM and all this other fun jazz that's kind of starting to happen and so on.

[00:48:50] So, but yeah, those, those types of things, I think, um, like you said, trade shows and relevant industry, you know, podcasts and so on are definitely places to, to really sort of soak in as much information as possible. So you guys are certainly helpful in contributing to that. So thank you. Yeah. Yeah, totally. Yeah. If listeners want to get in touch with you and learn more about what your services at my sky are, um, how are they going to touch with you? Certainly.

[00:49:17] So, uh, I would certainly say, uh, they can email me. It's just ryanatmysky.com. It is super easy, uh, to remember, but if not, just find me on LinkedIn. So, uh, I'm always answering and messaging people on LinkedIn. So if, uh, if you happen to be on LinkedIn, that's probably the best way to get ahold of me. Thank you so much for the wisdom. Great. We'll see you on the next one. Thanks Ryan. Take care. Thanks guys.