Owning an Airplane Through a Business: Structure, FAA Rules and Tax

Most buyers can skip this page. If you are buying an airplane in your own name and flying it for your own purposes, the structure question is already answered and nothing here applies to you.

It matters if you are considering an LLC, co-ownership, or any business use. Those routes carry real advantages — and two traps that catch people who did exactly what seemed sensible.

This page explains what the rules actually are, in enough detail that you can have an informed conversation. It does not tell you what to do. The right structure depends on facts about your business and your state that no article can know, and getting it wrong is expensive in ways that are hard to unwind.

The three ways to hold an aircraft

Personally. The simple case. Registration is in your name, there is no entity to maintain, and none of the FAA problems below can arise. You have no entity-level liability shield, which is what sends most people looking at the alternatives.

Through an entity, usually an LLC. Almost always motivated by liability protection, sometimes by tax treatment. This is where the trap lives.

Co-ownership. Two or more owners, either named together on the registration or sharing an entity. The cheapest honest route into more airplane than one person needs, and common in general aviation. It brings its own questions — scheduling, maintenance decisions, and what happens when one owner wants out — which belong in a written agreement rather than a handshake.

Whichever you choose, remember from the closing step that registration is made in the legal name of the owner. The decision has to be made before you sign, and it is not something you can defer and tidy up later.

The trap: flight department companies

Here is the single most useful thing on this page.

The instinct is universal and sensible-sounding: put the airplane in its own LLC, so that if something goes wrong the liability stops at the entity. On its own, that produces exactly the structure the FAA objects to.

An entity whose only business is owning and operating an aircraft is what the FAA calls a "flight department company." The FAA's position is that if an LLC's primary business is operating an aircraft, it is subject to Part 119 certification — the commercial certification requirement — even when it carries only its own members and their guests.

And the FAA has addressed the obvious objection directly. The fact that the LLC was organised for liability purposes, or set up as a disregarded entity for tax purposes, does not change the assessment.

Why the rule works this way

It follows from how the regulations divide flying.

• Part 91 governs operations not for compensation or hire. This is ordinary private flying, and it is where you want to be — less regulatory overhead, lower cost, more flexibility.
• Part 135 governs operations for compensation or hire — charter. It requires a certificate, and the compliance burden is substantial.

A company whose sole business is operating the aircraft is, by definition, in the business of air transportation. The flights are the business. That reads as carriage for compensation, and commercial rules follow.

What is actually at stake

This is not a paperwork technicality with a paperwork penalty. The consequences compound:

• It can put you in violation of Part 91.
• It can breach your financing agreement, which will have been written assuming lawful operation.
• It can void your insurance policy — the one from the previous step, bought on the assumption of a lawful Part 91 operation. An insurer that discovers an uncertificated commercial operation after a claim has a straightforward reason to deny it.

That last one is why this page exists. The whole reason to use an entity was to limit exposure, and done carelessly it removes the protection you actually depend on.

The two shapes of a fix

Both are real and routinely used. Both are professional work — what follows is enough to understand what your attorney is proposing, not a template.

Operate within a real business

A company may operate its own aircraft under Part 91 where the flying is within the scope of that company's actual business, provided transportation is not the business the company is in. A construction firm flying its own people to job sites is using an aircraft in furtherance of construction. The problem entity is the one that does nothing else.

The practical implication: an existing operating company with real revenue is a very different starting point from a new single-purpose LLC.

A dry lease

The owning entity leases the aircraft without crew to the operating company or individual, who supplies the crew, holds operational control, and flies under Part 91.

This is where precision matters, because the distinction is not the document's title:

• A dry lease is the aircraft alone. The lessee provides the crew.
• A wet lease is aircraft plus crew. That is carriage for hire and generally requires Part 135.

Operational control is the test, and the FAA looks at substance rather than paperwork. It conducts a case-by-case analysis of the lease terms and of how the arrangement actually works in practice. A document labelled "dry lease" that functions as a wet lease will be treated as a wet lease — a problem for the lessor and potentially the lessee too.

The blunt version: a lease template downloaded from the internet is not a structure. What the FAA is examining is who really directs the flights, and no document settles that on its own.

Sharing costs with passengers

Separate from entity structure, and relevant to nearly every private owner.

A private pilot may share operating expenses with passengers under 14 CFR § 61.113(c), within limits that are stricter than most people assume:

• You must pay at least your pro rata share. Carrying three passengers means the flight divides four ways and you pay no less than a quarter. Not a third. You are one of the people on board.
• Only some costs are shareable — fuel, oil, airport expenditures and rental fees. That is the complete list. Maintenance, insurance, hangar and your engine reserve cannot be shared. For an owner this is the real limitation: most of what the airplane costs you is not on that list.
• There must be a common purpose. The FAA consistently reads § 61.113 to require that pilot and passengers share a genuine reason for the flight. Flying somewhere solely to transport someone else is not cost sharing.
• No holding out. Communicating to the public that transportation is available — advertising, posting offers, anything that makes you look indiscriminately available — is prohibited regardless of who pays.

Anything received beyond a lawful expense split can count as compensation, which moves the flight under commercial rules. Worth knowing that the FAA reads compensation broadly: it is not limited to money, and guidance has treated benefits as small as a free meal as compensation.

What business use actually obliges you to do

This is the part buyers least expect, and the reason an entire service industry exists.

Buying through a business is not a one-time filing. It starts an evidentiary obligation that runs for as long as you claim the deduction.

Substantiation

An aircraft is listed property under the tax code, and IRC § 274(d) disallows the deduction unless you substantiate each element of the expense. Adequate records must establish:

• the amount
• the place
• the date
• the business purpose of the use, and
• the business relationship to you of any person aboard the aircraft

Read that last one again, because it is the one that surprises people. It is not enough to log the flight. You need a record of who was on the airplane and why they were there, flight by flight, indefinitely.

If you are wondering whether anyone really keeps records at that granularity — firms exist whose entire product is doing exactly this, and one of them serves thousands of aviation clients. The obligation is real.

Personal and entertainment use

Two rules interact here.

IRC § 274(a) disallows any deduction for use of a taxpayer-provided aircraft for entertainment, amusement or recreation. That is a disallowance, not a haircut.

IRC § 274(e)(2) then provides an exception: the disallowance does not apply where the value of the personal use is properly imputed to the employee and reported as compensation. Valuation is commonly done using SIFL rates — a standard industry fare level formula.

There is an asymmetry worth knowing about before you assume imputation solves everything. For an employee who is not an executive officer, imputing income at SIFL rates allows the full cost of the use to be deducted as compensation. For executive officers, under § 274(e)(2)(B), where SIFL rates are used the deduction is capped at the SIFL amount — which is typically far below what the flight actually cost.

And do not assume nobody checks. The IRS has run a Corporate Aircraft Initiative specifically examining personal use of business aircraft.

State sales and use tax

Often the largest single tax consequence of the purchase, and decided by choices made around closing. It is state law, so it varies enormously — what follows are the shapes that recur, never an answer for your state.

• Sales tax applies at the purchase; use tax applies where the aircraft is first used or based. These are complements. Avoiding one very often triggers the other, which is the flaw in the folk wisdom about registering somewhere with no sales tax — the state where you actually keep and fly the airplane generally wants its use tax.
• Fly-away exemptions are common: a state exempts the purchase if the aircraft is removed within a set window. Florida, for instance, exempts nonresident purchases made through a registered dealer where the aircraft leaves the state within ten days. Both the window and the conditions differ by state.
• Casual or occasional sale exemptions may apply where neither party is in the business of selling aircraft. But many states specifically carve aircraft out, and others cap the exemption at a threshold far below any aircraft price.
• Documentation decides it. These exemptions are evidenced, not assumed. Missing or incorrect paperwork gets the exemption denied, and the liability lands on the buyer — after the deal has closed and the leverage is gone.

Depreciation is the other half of the tax conversation, and the reason many buyers consider business ownership in the first place. We are deliberately not covering the mechanics: the rules change with legislation and the answer is entirely situation-specific.

When to bring in a professional

Before you sign. Not after.

Nearly everything on this page is decided by the structure you put in place at purchase, and most of it is expensive or impossible to unwind afterwards. The registration goes in the owner's legal name; the lease either establishes operational control or it does not; the sales tax exemption is either documented at the time or it is lost.

Two different specialisms, and you may need both:

• An aviation attorney for structure, operational control, and lease documents. General business counsel is usually not enough — the flight department problem is specific to aviation and does not resemble anything in ordinary corporate practice.
• A CPA with aircraft experience for depreciation, substantiation systems and state tax.

Firms exist that do only this, for exactly the reasons above. If you are buying personally and flying privately, you need none of it. If there is a business anywhere in the picture, the cost of an hour of good advice is trivially small against the exposure.