SHOULD I USE A C CORP OR AN S CORP FOR MY AIRCRAFT LEASING BUSINESS? ADDRESSING THE QUESTION OF FIXED ASSET DEPRECIATION

I get a lot of questions about this. At one of the last Master Minds, one of the participants posed a scenario in which he has a company where he purchases aircrafts and then leases them out. These aircrafts are useful for this purpose for about 3 years, at which time they are usually sold and replaced. He asked me what type of corporate entity he should use and also how he would go about accelerating the depreciation of the aircrafts in this first 3 years. I will attempt to answer his question in this posting.


The income of a C corporation can be taxed twice: once at the entity level and again at the individual level when profits are distributed as dividends to shareholders. Not so with an S corporation or LLC; the income from these entities passes through directly to the owner’s individual tax return, thereby escaping double taxation. In this regard the S corporation and LLC enjoy an advantage. However, Section 179 of the Internal Revenue Code (modified after the September 11 attacks and again as part of the Economic Stimulus Act of 2008) can enable owners of C corporations to save thousands of dollars more per year on taxes than if they were to use the S corporation or LLC structure. Section 179 deals with the election to expense business equipment in the first year that it is placed into service (see “Qualifying Property” at the link I’ll give below) as opposed to depreciating it over the course of its useful life. The same deduction is also available to the owner of the C corporation on his individual tax return. Yes that’s right. The owner of the aircraft leasing business can claim the deduction for his aircraft on his corporate return and then again on his individual return. Gotta love that loophole!


Using another example, suppose in 2007 a business owner purchased $125,000 of computer equipment, used 100% for business purposes; and a $50,000 SUV (weighing at least 6,000 pounds--see http://www.section179.org/section_179_vehicle_deductions.html ) used 50% for business. The maximum 2007 section 179 write-off is $125,000, so an S-corporation or LLC would allow the owner to reduce taxable income by the full cost of the computer equipment; however, because the owner is not considered an entity separate from the S-corporation or LLC for tax purposes, the SUV would not be available for section 179 treatment. But the owner of a C-corporation could write off the computer equipment on the corporation’s return; then reduce his taxable personal income by $25,000 ($50,000 cost X business use %, subject to $25,000 limit for SUVs) for the vehicle.


We use 2007 as an example because the Economic Stimulus Act of 2008 allows amended returns to be filed for 2007 at late as October 15, 2008—assuming extensions have been obtained. But 2008 has its own unique Section 179 allowances, chief of which are increased limits and bonus depreciation. The maximum amount that can be expensed under Section 179 for 2008 is $250,000 and the phase-out begins at $800,000 (e.g. if 2008 equipment purchases total $900,000, the available 179 deduction is reduced dollar-for-dollar by the amount in excess of the cap, to $150,000) increases of $125,000 and $300,000, respectively, over 2007. In addition, bonus depreciation of 50% (in addition to regular annual depreciation) is available for 2008. See http://www.section179.org/section_179_calculator.html for an example. As the table below indicates, Section 179’s generosity is scheduled to evaporate as of 2010.


Though Section 179 cannot be used to reduce taxable income below zero (that is, to generate a loss), it can be exploited to produce tax savings that are more than cash paid for expenses. With a non tax/capital lease, $250,000 a person or entity can write off $250,000 in leased equipment, despite cash outflows for the lease payment being substantially less than this amount. See http://www.section179.org/leases_and_section_179.html.


Comments? Questions?

Posted by Greg Miller, CPA