Part I · Asset Classes · No. 02

Private aircraft

An aircraft is depreciable property, an entertainment facility, listed property, a regulated commercial vehicle, and a personal-transportation conveyance — all at once. The applicable tax rule depends on which of those characters dominates each flight.

The asset class in tax terms

For federal income-tax purposes, a private aircraft used in a trade or business is depreciable tangible personal property under §168, generally with a five-year MACRS recovery life for non-airline aircraft predominantly used in business. The aircraft is listed property under §280F(d)(4)(A)(ii), subject to the more-than-50% predominant-business-use test and contemporaneous substantiation requirement. Personal entertainment use of a business aircraft is disallowed for deduction under §274. Operating expenses for personal use are partially or fully nondeductible.

Acquisition

Aircraft purchase prices range from low-seven figures for light jets to nine figures for the largest VIP airliners. The tax cost of acquisition includes:

• Federal customs duty. Civil aircraft enter the United States duty-free under the Civil Aircraft Agreement (HTS 8802).
• State sales or use tax. Material in states without a fly-away exemption; eliminated entirely by Montana-LLC registration (no state sales tax). California, New York, and Texas pursue use-tax claims aggressively on aircraft based or substantially used in those states. See sales and use tax.
• FET (federal excise tax) on commercial transportation. Acquisition itself attracts no federal excise; operational flights under Part 135 attract 7.5% air-transportation excise under §4261.
• State registration fees and annual personal-property tax. California, Washington, Texas, and Connecticut impose meaningful annual ad valorem tax on aircraft based in the state.

Holding and operation

Depreciation is the central holding-period tax consequence. Aircraft predominantly used in business may be depreciated:

• Under MACRS at a five-year recovery (non-commercial business use) or seven-year recovery (Part 135 commercial); see Rev. Proc. 87-56.
• With bonus depreciation under §168(k) — phased down to 20% in 2026.
• Subject to the §280F predominant-use test in each year; failure produces recapture of accelerated depreciation.
• Subject to §274 disallowance for entertainment-use flights.

Substantiation is the operational binding constraint. Logbook entries documenting each flight, passenger manifests, purpose codes (business, personal-non-entertainment, personal-entertainment), and reconciliation to ledgers are the standard documentation. Without contemporaneous records, the deduction fails regardless of underlying merit.

Income from the asset

Aircraft used in a charter business produce gross charter revenue, with related operating costs deductible. Charter revenue is generally services income, possibly subject to self-employment tax for an individual owner or to the §1411 NIIT for an investor. A passive owner whose role is purely capital may face passive-activity-loss limits under §469.

Dry leases (aircraft only) versus wet leases (aircraft with crew) are distinguished under FAA rules and produce different tax outcomes. Dry leases between commonly owned entities have been used to allocate ownership and operational responsibility; the IRS has challenged structures that effectively conducted commercial operations under the dry-lease label. See Part 91 vs. Part 135.

Disposition

Sale of a depreciated aircraft produces §1245 ordinary-income recapture to the extent of prior depreciation, with gain in excess of total depreciation as §1231 capital gain. The 2017 amendment to §1031 eliminated like-kind exchange treatment for aircraft. The remaining deferral mechanisms — installment sale under §453, contribution to a partnership under §721 — are narrower.

Gift and estate

Transfer by gift or inclusion at death is at fair market value. Aircraft appraisal is a specialized field; the Bluebook (Aircraft Bluebook Price Digest) and Vref provide the recognized comparable-market data. Aircraft held by a closely held entity may qualify for §6166 estate-tax deferral if it forms part of an active aviation business.

Common structures

• Single-purpose LLC. Typical holding entity, often formed in Delaware or Montana.
• Owner-flown Part 91. Personal aircraft operated under FAA Part 91. No 7.5% transportation excise. Business use requires §280F substantiation.
• Charter Part 135. Aircraft placed on a charter certificate; held out for hire; subject to 7.5% transportation excise and Part 135 operational requirements.
• Fractional ownership. NetJets-style fractional programs. §4043 imposes a per-gallon fuel surtax on fractional flights.
• Management-company arrangements. Third-party management of owner's aircraft with charter availability when owner is not using. IRS audit attention on whether management fees include taxable air transportation under §4261.
• Isle of Man and San Marino registrations. Aircraft registered offshore for VAT and operational reasons; cross-references with Isle of Man and San Marino entries.

Audit and enforcement landscape

IRS examination of business-aircraft deductions has been a sustained priority. In 2024 the IRS announced an expanded audit campaign targeting personal use of business aircraft, with a focus on §274 entertainment-use disallowance and §280F predominant-use compliance. The IRS uses flight-tracking data from public sources (the FAA's database, third-party flight trackers) cross-referenced with corporate tax returns to identify mismatches.

The typical deficiency case involves: an aircraft owned by an operating business; predominantly personal trips by executives and family; insufficient substantiation; and consequent disallowance of depreciation and operating expense. See aircraft personal-use audits.

State use-tax enforcement on aircraft is similar to yacht enforcement. California has pursued aggressive multi-year audits of aircraft based at California FBOs, including aircraft owned by Montana LLCs. The "more than half the time" California presumption of use tax has been the principal claim.

Jurisdictional notes

• Montana. No state sales or use tax; widely used for U.S.-registered aircraft titling. Substance — actual use, hangar location, pilot residence — controls audit defensibility.
• Delaware. Holding LLC formation; combined with Montana titling or offshore registration.
• Isle of Man. "M-registered" aircraft; favorable VAT treatment when properly structured; popular for non-EU operators of EU-based aircraft.
• San Marino. "T7-" aircraft registry; alternative offshore registration.
• Aruba and Bermuda. Other recognized offshore registries with operational pedigree.

Reviewed May 2026