Depreciating aircraft parts, dealing with taxes, etc.

"Andrew Gideon" wrote in message
news
On Thu, 10 May 2007 16:14:30 -0700, Matt Barrow wrote:

IIUC, it should be set up as a reserve/expense account, not as income to
the corporation. The only income to the corporation should be the
management fees (??)

I guess I'm confused about how payments into the company, to be used in
some future year, are tracked as an expense.

In accounting they're called a "Pre-paid Expense"

[...]


It sounds like you're trying to depreciate components, rather than the
entire aircraft, on an hourly basis.

That's what I was thinking.

It sounds like you don't quite understand "Depreciation". Depreciation is a
reduction in value, there is not periodic cash flow. The only cash
DIFFERENCE is when you sell the asset (in this case, an aircraft) and the
difference is in how much less you get for it than you GAVE for it.


I don't think that's a good idea.
That takes much more work for your accountant.

That's a good point.

[...]

Are you a "partner" to the corporation, or is it third party, such as a
partnership or lease back?

I'm one of the "shareholders", except that it's a corporation that doesn't
issue shares.


(My explanation here is probably NOT technically correct) My company
(LLC) is the registered owner of my aircraft. We deduct expenses as
incurred and take depreciation and make an entry in "Reserves" on an
hourly basis for such things as recurring maintenance and overhaul.

So you depreciate the value of the entire aircraft by the reserve amount
each hour?

No, the reserve is for periodic maintenance, such as overhauls, annuals,
etc. For depreciation, it's strictly an accounting/tax entry.

And then, at engine overhaul time, you increase the value of
the airplane by the value of the engine?

Possibly. Some aircraft appreciate in value, some depreciate.


The LLC then "charges"me for any personal use I make of the aircraft. I
then declare that as personal income, just as when I draw from our cash
accounts for "personal income - cash".

I don't follow this paragraph at all, I'm afraid. If you're paying into
the LLC, how is that personal income?

I'm not paying into the LLC, all company revenue flows INTO the LLC and the
LLC holds certain assets, one of which is my aircraft.

At the same time, all expenses are paid by the LLC, such as construction
costs, fees, materials, aircraft expenses, etc., and cash that we withdraw
as our income. That way, the value of the company keeps growing nad does not
require "leverage". We've done some small projects that we capitalized (ie,
paid for) ourselves, rather than using banks for cost of construction loans.

If you are not using your aircraft for business, you can't depreciate your
share of it. If you are, you can only depreciate that portion that you use
it for business, but you must use it for business 50% of the hours you use
it in total.

Such are the benefits of operating as a corporate entity, rather than as an
individual: you pay expenses out of pre-tax dollars rather than out of
after-tax $$.


--
Matt Barrow
Performace Homes, LLC.
Colorado Springs, CO

On Thu, 10 May 2007 20:03:02 -0700, Matt Barrow wrote:

In accounting they're called a "Pre-paid Expense"

Ah.

[...]


It sounds like you're trying to depreciate components, rather than the
entire aircraft, on an hourly basis.

That's what I was thinking.

It sounds like you don't quite understand "Depreciation".

That wouldn't surprise me at all laugh.

Depreciation is
a reduction in value, there is not periodic cash flow. The only cash
DIFFERENCE is when you sell the asset (in this case, an aircraft) and the
difference is in how much less you get for it than you GAVE for it.

Hmm. I thought that depreciation showed on the books as a loss even
before the depreciating asset was sold. This would have - in my
admittedly ignorant view - permitted the corporation to accumulate the
asset of the cash paid into reserves w/o showing a profit.



I'm not paying into the LLC, all company revenue flows INTO the LLC and
the LLC holds certain assets, one of which is my aircraft.

You don't pay an hourly fee into the LLC, the money from which goes into
an account that is used to pay expenses like overhaul etc.?

[...]

If you are not using your aircraft for business, you can't depreciate
your share of it. If you are, you can only depreciate that portion that
you use it for business, but you must use it for business 50% of the
hours you use it in total.

Hmm. So if the aircraft are not used for business - which is mostly, if
not entirely, my case - then depreciation isn't possible? But isn't the
corporation renting out that asset, thereby making it the corporation's
business (even if the people using the rental aren't using this to further
their own businesses)?

- Andrew

"Andrew Gideon" wrote in message
news
On Thu, 10 May 2007 20:03:02 -0700, Matt Barrow wrote:

In accounting they're called a "Pre-paid Expense"

Ah.

[...]


It sounds like you're trying to depreciate components, rather than the
entire aircraft, on an hourly basis.

That's what I was thinking.

It sounds like you don't quite understand "Depreciation".

That wouldn't surprise me at all laugh.

Depreciation is
a reduction in value, there is not periodic cash flow. The only cash
DIFFERENCE is when you sell the asset (in this case, an aircraft) and the
difference is in how much less you get for it than you GAVE for it.

Hmm. I thought that depreciation showed on the books as a loss even
before the depreciating asset was sold.

Not a loss, but a reduction in asset valuation which can therefore be
charged against income.

This would have - in my
admittedly ignorant view - permitted the corporation to accumulate the
asset of the cash paid into reserves w/o showing a profit.



I'm not paying into the LLC, all company revenue flows INTO the LLC and
the LLC holds certain assets, one of which is my aircraft.

You don't pay an hourly fee into the LLC, the money from which goes into
an account that is used to pay expenses like overhaul etc.?

The LLC is my company, not a specific LLC to hold/maintain the aircraft.

We have an account on our books for something like "Maintenance Reserve",
held as a liability until the time the expense is paid. For our TSIO-550C we
allocate (not pay) $26.50 an hour for a 2000 hour TBO and $34 something an
hour for various maintenance such as the annual, avionics upgrades,
inspections and even unforeseen maintenance.


[...]

If you are not using your aircraft for business, you can't depreciate
your share of it. If you are, you can only depreciate that portion that
you use it for business, but you must use it for business 50% of the
hours you use it in total.

Hmm. So if the aircraft are not used for business - which is mostly, if
not entirely, my case - then depreciation isn't possible?

Correct. Depreciation is a business deduction, not a personal one.

But isn't the
corporation renting out that asset, thereby making it the corporation's
business (even if the people using the rental aren't using this to further
their own businesses)?

As a shareholder, you could only take your portion of the allotment of
depreciation if your use was for business. In the (cross)eyes of the IRS,
whether you own it, or the LLC owns it, what makes all the difference is how
you USE it (business versus personal).

Personal use is not going to be deducible. In that case (personal use), it's
just a really expensive toy. Not only for depreciation (some Bonanza's
APPRECIATE in value, so you'd have to recoup any deductions for business
use) but for expenses.

When a corporate entity hold assets, you have to account for them
separately. For instance, my aircraft, certain computers we have (I have a
$5000 blueprint printer), my SUV, office furniture, etc, is on my LLC's
books. OTOH, my wife's car, my personal car, etc., are our _personal_
property and we pay for them like anyone else (i.e., out of after-tax income
to us from the LLC).

For a good explanation (i.e., laymen's terms) get the book "Rich Dad, Poor
Dad" by Robert T. Kiyosaki http://preview.tinyurl.com/25o2j8 . It
explains common issues with a eye towards self-employment and the benefits
that regular working people miss out on.

Hope that helps, but understand that I'm not an accountant, but I pay plenty
for their services :~(


--
Matt Barrow
Performace Homes, LLC.
Colorado Springs, CO

On Thu, 10 May 2007 20:03:02 -0700, "Matt Barrow"
wrote:


"Andrew Gideon" wrote in message
news
On Thu, 10 May 2007 16:14:30 -0700, Matt Barrow wrote:

IIUC, it should be set up as a reserve/expense account, not as income to
the corporation. The only income to the corporation should be the
management fees (??)

I guess I'm confused about how payments into the company, to be used in
some future year, are tracked as an expense.

In accounting they're called a "Pre-paid Expense"

[...]


It sounds like you're trying to depreciate components, rather than the
entire aircraft, on an hourly basis.

That's what I was thinking.

It sounds like you don't quite understand "Depreciation". Depreciation is a
reduction in value, there is not periodic cash flow. The only cash
DIFFERENCE is when you sell the asset (in this case, an aircraft) and the
difference is in how much less you get for it than you GAVE for it.

Which is where you really have to be careful.
If you have written off the entire cost of the airplane over the
years, or specific period, then when you sell it the *entire* value
you receive is taxable which makes both expensing and writing off a
double edge sword.

Roger (K8RI) wrote:

Which is where you really have to be careful.
If you have written off the entire cost of the airplane over the
years, or specific period, then when you sell it the *entire* value
you receive is taxable which makes both expensing and writing off a
double edge sword.


Yes, but if you qualify for the 15% taxable gain you will pay less
tax in the long run than if you didn't depreciate it (which really
you don't have much of a choice not to). Even the current 25%
recapture rate is probably less than your top end bracket at 28.