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Should you get a Private or Shared Jet?



   Convenience, Savings
   And a Sense of Security

It seems not a day goes by that you don’t hear something about airport security. Among the more newsworthy developments in recent weeks:
  • Alternative Access to Business Aircraft

         There are many ways to gain the use of a business jet, determined by regulatory considerations, costs, tax consequences, security concerns and simple preferences. Here is a list of some of the alternatives to fractional ownership:
         Owner-Operator – Your company buys its own aircraft, either new or used and is responsible for hiring crew and maintenance workers, as well as arranging for other support services. You can help defray costs by putting the aircraft into service under separate arrangements with charter operators when your company is not using the plane.
         Joint Ownership – The aircraft is registered under multiple owner names and the acquisition and ownership costs are shared.
         Time Sharing – Your business leases an aircraft and crew from another owner. The charges are generally limited to slightly more than direct operating costs for the flights.
         Aircraft Interchange – Your company owns a plane and can lease another owner’s aircraft with crew in exchange for equal-value time on your company’s aircraft.
         Operating Lease – The owner of the aircraft divests full control and responsibility for the plane to your company. Your business is then responsible for crew, insurance and the full cost and risk of maintaining and operating the aircraft. The lease amount generally covers financing costs and a profit for the owner. You may also be charged a monthly reserve for maintenance. The owner retains depreciation tax benefits and an interest in the residual value at the end of the lease. Leases may be structured as lease-purchases.
         Sale Leaseback – This involves the simultaneous sale of an aircraft to a financing company, and then leasing it from the company. The owner retains tax benefits.
         Charter – Your business hires an aircraft and crew for a specific flight. The aircraft operator has full regulatory burden.
       Before signing on to any of these arrangements, check with your company's advisers about financial, legal, regulatory and tax implications.

    The United States and Canada agreed to loosen the ban on liquids and gels in carry-on luggage.
  • Israeli airport security experts visit LAX to offer suggestions on how to protect travelers and prevent terrorist attacks.
  • Thirty-three airports are installing scanners to read e-passports from 27 ally nations whose citizens don't need visas to visit the U.S.

It’s a fact of life. Officials, legislators and travelers around the globe have had security on their minds since the September 11, 2001, terrorist attacks. As a result, airport security has increased and travel has been restricted. In the meantime, business and leisure travelers must deal with the consequences.

This has led many companies to consider the pros and cons of fractional jet ownership. Having access to a corporate jet not only helps employees feel more secure and relaxed when flying, it can also slash traveling time and costs. For example, the time to fly from New York to Toronto, office door to office door, usually takes four or more hours by commercial airliner, including airport check in and waiting time. By corporate jet, the time can drop to just two-and-a-half hours.

How It Works

In a fractional ownership arrangement, a company buys (or in some cases leases) a share in an aircraft. The company can then use that aircraft for a certain number of hours or days a year. If that plane is unavailable when it is needed, the company generally gains access to a pool of identical or similar aircraft.

When weighing whether to buy, charter, or fractionally own an aircraft, the general rule of thumb is:

Charter a jet if your company’s flying requirements range from zero to 100 hours a year.

Buy a fractional ownership if flying time averages from 101 hours to 399 hours a year.

Operate your own fleet
if flying time is 400 hours a year or more.

While there are many savings to be realized by buying fractional interests in a business jet, the programs are still pricey. There are four costs involved, three of them fixed and one variable:

1. Initial outlay for the ownership share.
2. A monthly management fee for crew, training, hangar, and insurance.
3. A base hourly rate for each hour flown that includes maintenance, standard catering, and normal landing fees.
4. A variable fuel adjustment component that is added to the base hourly rate to account for fuel price fluctuations.

As an example, one U.S. fractional ownership company charges more than $800,000 for a 1/8th ownership in a Raytheon Hawker 400 XP, which includes 100 hours of flying time. In addition, it charges a monthly management fee of more than $11,000 and an hourly direct operating charge of more than $1,600, excluding the variable fuel surcharge, international fees and a federal excise tax of 7.5 percent. That company writes initial ownership agreements for five years, so you create a bank of hours that your company will use over that time.

Tax Consequences

The tax implications of owning aircraft or a fractional interest are extremely complex.
Do not rely on statements made by sales representatives. This is a time when you need expert tax advice before purchasing. As a Tax attorney, I will investigate the relevant sales and use taxes charged by different states. Tax deductions depend on a variety of factors including ownership, depreciation, maintenance and insurance costs. The American Jobs Creation Act of 2004 and IRS Notice 2005-45 made significant changes involving the personal use tax treatment of a company plane. Before you sign anything or make any commitments to purchase call me!

The Advantages

Among the benefits of fractional ownership of a business aircraft:

  • Having an aircraft, crew, scheduling, and maintenance on demand.
  • Access to thousands more airports than commercial airliners, many of them significantly closer to your ultimate destination.
  • Savings that statistically include four hours of travel time and eight hours productive time for each trip (you can hold meetings during flight time), fewer hotel bills and overnight time, and $1,400 in direct costs, airfare, salary, and expenses.
  • Guaranteed costs over the term of the arrangement, with the exception of the variable fuel charges.
  • Less time away from the office and more time with families.
  • The Complications

    However, fractional ownership is a complicated transaction that you shouldn’t just rush into. Talk to an aviation specialist who can perform due diligence on the company you plan to buy from and help you understand what is involved when you sign the many documents required.

    It's also a good idea to develop a travel profile that includes answers to the following questions: Who in your company will be using the plane and for what purposes? What is the estimated average trip length? How much baggage will be carried?

    Because fractional ownership programs are complicated, here is a list of some more questions to answer before going forward:


    Pre-Purchase Checklist



      How small an interest can your business buy? Check for economies of scale — your company could gain an advantage by buying two 1/16th interests in two different planes rather than a single 1/8th interest in one plane.
      What will ownership cost your business every year?
      Can you lease rather than buy?
      Are there any hidden costs?
      What is the company’s cancellation or buyback policy?
      Can you negotiate better terms with the company or with another company that offers fractional ownership?
      How does the company calculate your hours of usage? Some companies, for example, calculate it as the time between wheels up and wheels down plus 12 minutes (six minutes prior to takeoff and six minutes after landing.)


      What is your company’s responsibility if the plane is damaged while you are using it? What if it is damaged while another fractional owner is using it?
      What liability does your business have if the aircraft is operated negligently by one of the other owners?
      Will your business have any licensing obligations to U.S. or other regulators?
      What happens if other fractional owners don't pay their share?


      How is the plane maintained and kept up to safety standards?
      Who supplies the maintenance?
      What can you put into the agreement to ensure the safety of the jet?
      What is the safety record of the people involved?


      What is the range of the aircraft?
      Can you use the plane anywhere in the U.S., Canada, Mexico or Europe?
      Where can you not fly the plane? (war zones, no-fly zones or areas that have travel warnings to U.S. citizens?)
      Can you and other employees take a test flight?
      Can a qualified pilot from your company fly the plane?
      What happens if someone else is using the plane?
      Can you sell, exchange or transfer your fractional interest to another party without the consent of the lessor?
      What happens if there are no more planes like yours in the pool of available jets?

      Virtualex.com Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email: ron@taxesq.com
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