Managing Aircraft Ownership Costs: Tax Impacts of Various Offsets
Dry Leases • Time Shares • Fractional Ownership
Presented by Tom Wagner
NBAA Business Aviation Taxes Seminar – April 28, 2026 • Four Seasons Hotel Denver, CO
Dry Lease (Aircraft Only – Part 91)
• Lessee hires its own pilots and pays all operating expenses; assumes operational control
• Keeps the flight under Part 91 (generally no FET on air transportation)
• Tax Benefits: Lease payments are rental income to the lessor; lessor retains full MACRS depreciation + 100% bonus depreciation eligibility (IRC §168(k), permanently reinstated by the One Big Beautiful Bill Act of 2025 for qualifying aircraft placed in service after January 19, 2025)
• Lessee generally deducts payments as ordinary and necessary business expenses (when used for qualified business flights)
• Key Challenges: Treated as a per se passive rental activity under IRC §469(c)(2) — net losses (often large in Year 1 due to bonus depreciation) can only offset passive income and are otherwise suspended and carried forward (see Grouping Election section to follow)
• State Tax: Sales or use tax frequently applies to lease payments (treatment varies by state, aircraft domicile, and lessee use)
• Compliance Note: Strict transfer of operational control required; Truth-in-Leasing disclosures and FAA notification often apply for large aircraft (FAR §91.23)
Brief Explanation of Grouping Elections (Primary Relevance to Dry Leases)
A dry lease is generally classified as a “rental activity” and is therefore per se passive under IRC §469(c)(2), which limits the current deductibility of losses — including those generated by 100% bonus depreciation — against non-passive income such as W-2 wages or active business income. The grouping election under Treas. Reg. §1.469-4 provides a planning opportunity. It allows taxpayers to combine the rental activity with one or more trade or business activities and treat them as a single activity for passive loss purposes. If successful, losses from the combined activity may be treated as non-passive (and currently deductible) provided the taxpayer materially participates in the overall activity. To qualify for grouping, the activities must constitute an “appropriate economic unit” based on all relevant facts and circumstances. The IRS considers factors such as:
• Similarities and differences in the types of activities
• The extent of common control
• The extent of common ownership
• Geographic location
• Interdependencies between the activities (e.g., shared customers, employees, or accounting systems)
When grouping a rental activity with a non-rental trade or business activity, at least one of the following must also be satisfied: the rental is insubstantial in relation to the trade or business, the trade or business is insubstantial in relation to the rental, or the owners hold identical proportionate interests in both activities. The election is made by attaching a statement to a timely filed original tax return and is generally binding for future years unless there is a material change in facts. Thorough documentation is critical. Grouping does not alter the rental character for other tax purposes and should be evaluated carefully with your tax advisor in light of your specific facts and circumstances.
Time Share Agreements (FAR 91.501(d) – Limited Reimbursement)
• Owner provides aircraft + crew (wet lease in FAA terms); strictly limited reimbursements (primarily up to 2× direct fuel cost plus specified flight expenses)
• Remains under Part 91 — no Part 135 certificate required
• FET Impact: Reimbursements treated as payment for taxable air transportation (IRC §4261); owner must collect and remit 7.5% FET + $5.30 domestic segment fee (2026) on Form 720, with credit available for fuel FET already paid
• Income Tax: Reimbursements generally includible in gross income; passive activity classification is uncertain (may qualify as a trade or business activity if material participation is met, in contrast to the clear per se passive treatment of dry leases)
• Best Use: Occasional, limited cost recovery when the other party does not want to supply pilots and full control of the aircraft and pilots should be retained
• Compliance: Owner retains operational control, simplifying Part 91 requirements
Fractional Interest Ownership (FAR Part 91, Subpart K)
• Purchase a fractional share (typically 1/16th or larger) in an aircraft or fleet; includes guaranteed annual occupied hours plus dry-lease exchange access to a broader fleet
• Lower capital commitment with built-in cost sharing; program manager handles significant operational responsibilities
• Tax Benefits: Treated as direct owner of your proportionate share; eligible for 100% bonus depreciation on the share (further details covered in the dedicated depreciation session)
• FET Treatment: Favorable 14.1¢ per gallon fuel surtax (IRC §4043) in lieu of the standard 7.5% air transportation tax; the program manager typically handles collection and remittance
• Passive Activity: Generally more favorable — often not classified as a rental activity because the owner retains possession and control for personal flights
• State Tax: Sales or use tax may apply to the initial purchase of the fractional interest or ongoing management fees (structuring through an entity can help optimize)
• Trade-off: Reduced control over specific tail numbers compared to whole-aircraft ownership
Summary Takeaways
• Dry Lease: Offers strong cash flow and full depreciation retention, but demands careful Part 91 operational control and consideration of grouping elections to address passive loss limitations.
• Time Share: Provides simple occasional reimbursement under Part 91, but triggers FET and has uncertain passive activity treatment.
• Fractional Ownership: Delivers many ownership benefits with lower capital outlay, simplified FET compliance, and generally favorable passive loss treatment.
• Choose the structure that best aligns with your usage patterns, overall tax profile, state domicile, and compliance preferences.
Disclaimer:
This handout is provided for educational purposes only and does not constitute tax, legal, or aviation advice. Tax rules are complex and depend on individual facts. Please consult your own qualified tax advisor, legal counsel, and aviation counsel regarding your specific situation.
