Private planes and luxury yachts are often seen as the ultimate status symbols, the toys of the ultra-wealthy. But what if we told you they are also a playground for tax deductions? Yes, you heard it right: these extravagant modes of transportation can lead to millions in tax savings.
In this article, we’ll take you on a journey into the world of private planes and yachts, exploring how the wealthiest Americans use them to their advantage in the tax game.
Flying High with Tax Deductions
Imagine flying to the breathtaking shores of Ireland, teeing off on a golf course with majestic mountain and bay views, or embarking on a Hudson River pleasure cruise aboard your enormous yacht.
These are just a few luxuries that the ultra-rich in America have recently enjoyed with their private jets and yachts. What makes these experiences even sweeter for them? The generous tax deductions that come along with these lavish possessions.
ProPublica has delved deep into how the ultra-wealthy navigate the tax system in the past couple of years. While some manoeuvres are on a grand scale, involving billions of dollars, the tax deductibility of private jets sheds light on how the system honestly operates.
Navigating the Tax Skies
The wealthy elite often claim deductions because their private planes serve primarily for business purposes. This seemingly simple claim can yield substantial tax benefits. But the line between business and pleasure can blur easily for the ultra-wealthy.
Even when they offer their planes for leasing, ostensibly for business purposes, they tend to excel at generating tax deductions rather than revenue.
Take Tony Alvarez and Bryan Marsal, founders of a successful restructuring consulting firm. They also own the Hogs Head Golf Club in Ireland, a venture born from their friendship. In 2016, they formed an LLC, named after their golf club, to purchase a Gulfstream IV jet.
The following year, President Trump signed a tax cut law that made buying a plane even more enticing. The entire cost of the plane could be deducted in the first year, thanks to “bonus depreciation.” This law also made pre-owned planes eligible for this treatment.
So, when Alvarez and Marsal acquired their second plane, a Gulfstream V, in 2018, the entire cost became deductible. That year alone, their two planes yielded a staggering $14 million tax deduction.
Tax Strategies in the Sky
Tracking the exact business use of private jets can be a convoluted process. The presence of nonbusiness guests, like family members, on a business flight can result in taxable fringe benefits. However, the IRS formula used for calculating this benefit significantly undervalues the cost of private jet travel, making it closer to the price of a first-class commercial ticket.
To maximize their tax advantage, jet owners often ensure that their business interests in a destination are crystal clear. For instance, they might prioritize visiting their secondary business location upon landing.
Sailing to Tax Savings
While private jets enjoy tax deductions, luxury yachts face a different tax treatment. Yachts are considered entertainment facilities, meaning deductions for business travel aren’t permitted.
Nevertheless, there are still opportunities for tax savings. Mike Fernandez, a successful investor with a fleet of yachts, has faced challenges in making his yacht charter business profitable.
His tax returns reveal significant expenses related to his yacht, but the revenue generated falls far short. These expenses, including depreciation, repairs, and wages, translate into substantial deductions.
However, auditing such businesses presents a formidable challenge for the IRS. Proving that a business owner was not genuinely trying to profit is a complex endeavor, especially when they can argue that using the yacht contributes to their primary business somehow.