One of the most frequently overlooked aspects of the business aircraft operation is how you fly the aircraft—under what Federal Aviation Regulations (FARs)—and how you manage the Internal Revenue Service, your insurer, and your overall liability of operations.
To make it overly simplistic, the world of business aviation can be divided into two categories: Part 91 and Part 135 of the FARs. Part 91 outlines using an aircraft for your own needs exclusively, while Part 135 affords you the ability to do that as well as rent the aircraft to third parties.
Part 135 typically has more onerous training and maintenance requirements, though in the league of $1 million and more aircraft, not as much as you might think. Due to high annual fixed costs, many perhaps ill-informed companies opt to remain Part 91 in the interest of keeping it simple and because of the perception of saving money. What these flight departments fail to include in their analysis are three potential nasty pitfalls: liability from operations, safety, and the taxman.
Liability of Operations
Due to the changes in the industry in 2005 with respect to operational control (who has operational control and how it is defined), the aircraft owner who operates under the umbrella of a Part 135 operation has significant advantages when it comes to catastrophic events. Depending on how each flight is operated (either with company people, clients, or third parties), the adroit flight department manager will highlight at all times how operational control remains squarely in the hands of the firm—that is, the air carrier.
While it is possible for individual companies to obtain their own air carrier certificate, most opt to form agreements with a local Part 135 air carrier who, in effect, serves as a babysitter for the aircraft when it is not flying and for the air carrier when it is. To the prudent risk manager, few other scenarios are as attractive as clearly delineating operational control away from the principal firm and asset.
The simple fact that you've decided to open your aircraft up to further scrutiny enables you to reach another level of safety. The increased training, limitations on flight and duty time, and aircraft inspection intervals actually lower a firm's exposure to real problems. While many flight departments prefer not to deal with the Federal Aviation Administration (FAA) more than is necessary and endure additional screening and checkrides more than they might otherwise, the win for management is simple: A drug program is in place and required, the training is frequent and audited by the FAA, and safety items on the aircraft become mandatory, not optional.
While many of us are not fans of excessive regulation and intrusion, it is hard to argue that the government's heart would be in the wrong place when it comes to blessing operations for which it has responsibility as the safety agency, which regulates the same airlines that carry the rest of us.
From a tax perspective, there is no question that Part 135 shows that the aircraft operator, while perhaps using the aircraft for personal use, is also deriving real income to offset the cost of the aircraft ownership and ultimately trying to build a business of making it available for hire. From a taxation perspective, the aircraft is very hard to attack as a purely luxury item when there are advertising, increased safety standards, etc.
Many clients who come to us seeking to better understand how to design a flight department are surprised to find out that, in the league of turboprops and jets, the increased cost to operate a for-hire aircraft versus one strictly for private use is not that much more. Once the accountant has a chance to apply the appropriate rules for your particular state (or country), you will generally find that you want to be in the income-producing bracket for a host of reasons—for example, it keeps the taxman at bay, and your bottom line for the flight department looks better.
To learn more about operational control, safety, and other aviation guidelines, don't hesitate to visit my blog at adamwebster.com.
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