1. © 2014 Vedder Price *David M. Hernandez is a Shareholder at Vedder Price P.C. and a member of the National Business
Aviation Association Tax Committee. Mr. Hernandez has considerable experience assisting a wide variety of clients (public
and private companies, banks, private equity firms, high-net-worth individuals, corporate flight departments, and charter
operators) with aircraft purchase/sale agreements, management agreements, leases, use policies, regulatory (FAA, IRS and
SEC) compliance and personal use of company aircraft.
Thinking About Buying a Business Aircraft?
By David M. Hernandez*
Shareholder, Vedder Price P.C.
Companies and individuals acquire aircraft for a
variety of reasons. Many companies use
aircraft to supplement their operations because
business aircraft allow for efficient, flexible,
safe, secure and cost-effective transportation to
a greater number of U.S. and international
destinations when generally compared to
commercial transportation. More importantly,
productivity is greatly improved because
employees are able to work while aboard the
aircraft, rather than wasting valuable time in
airports and on commercial airlines (with very
limited connectivity). Business aircraft also
allow employees to make several trips to
different locations and then return to their
headquarters or homes the same day,
potentially saving thousands of dollars in lost
productivity and travel expenses (hotels, meals,
car rentals, taxis, etc.), which would normally be
incurred over several days using other modes
of transportation.
However, the decision to acquire a business
aircraft is complex and requires a significant
amount of planning. The first step in the
planning process is to develop an acquisition
plan to determine what type of aircraft is best
suited for the company’s or individual’s
particular operational, financial and strategic
needs. This article provides an overview of the
critical factors to consider when thinking about
buying a business aircraft.
Operational Assessment
The first step in the process should involve an
assessment of the company’s operational
needs, in particular, how the company intends
to use the aircraft. Factors to consider include
the following: (i) how much the aircraft will be
used, (ii) what the typical destinations or
distances are, (iii) the number of passengers,
(iv) the need for multiple aircraft and (v) the
feasibility of alternative transportation options
(rail, airlines and cars).
This step should involve a comprehensive
discussion among all the relevant parties to
determine an operating profile based on the
company’s transportation needs. Thought
should also be given to future operations, such
as emerging markets, mergers and
acquisitions, potential changes to operating
structure and other unique needs, such as
providing transportation to clients, officers and
directors, and other guests. Many companies
also allow the aircraft to be used by officers for
personal use, and such use may have Federal
Aviation Administration (FAA), Internal Revenue
Service (IRS) and Securities and Exchange
Commission (SEC) implications. Finally,
companies may want to consider chartering the
aircraft commercially to obtain charter revenue.
Selecting the Right Aircraft
In today’s business aircraft market, companies
have a wide variety of aircraft and options from
which to choose. Companies narrow their
choices based on their operational needs,
focusing on cost, size and range. Business
aircraft are divided into turboprops and jets, and
jets are further divided based on cabin size and
range (very light, light, medium, heavy/ultra-
long-range). Companies should consider
whether to buy or lease a new or pre-owned
aircraft. Primary criteria companies consider
when selecting the right aircraft are
performance, comfort, maintenance and market
conditions. As a general matter, once a
company has narrowed its choices to a
particular aircraft class, it is critical to determine
the operating costs of aircraft within the cabin
class. The ideal aircraft is one which provides
the highest level of operational capabilities
consistent with the company’s needs at the
lowest aggregate hourly operating cost.
Financial Considerations
It is currently an extremely favorable market for
companies seeking to finance or lease a
business aircraft. As with any other significant

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© 2014 Vedder Price
capital expenditure, several financing options
exist and a careful analysis of the options is
critical. The first issue a company faces is
whether to simply pay cash or, given the current
historically low interest rates, whether better
uses of its cash exist. If the company decides
to finance, the next issue is whether to enter
into a loan or lease, and at what terms. Both
options have very different exit strategies,
disclosures and tax implications. A
comprehensive financial analysis will be
imperative to the decision-making process.
The analysis should consider the entire
ownership cycle from acquisition to sale and
include all fixed, variable, ownership and
transition costs. As discussed below, tax
implications such as depreciation, deductions,
sales/use tax and other taxes should be
analyzed thoroughly. Companies should seek
advice from within the company as well as third-
party aviation professionals to ensure that a
comprehensive analysis has been made
incorporating all relevant facts and
assumptions. An ideal financial analysis
includes a discussion of the following: (i) loan,
lease or cash purchase, (ii) potential charter
revenue, (iii) budget and tax implications, (iv)
residual values, (v) maintenance plans, and (vi)
purchase of a new or pre-owned aircraft.
Ownership Structure
One of the most important aircraft acquisition
planning decisions is determining the
appropriate ownership structure. The structure
will depend primarily on the company’s needs
and regulatory constraints. The most common
aircraft ownership structures include (i) a
company within a group of consolidated
companies, (ii) a single company (S-Corp or C-
Corp), (iii) two or more owners using a joint
ownership arrangement, (iv) an individual or
partnership (the partners must be individuals),
(v) fractional ownership, and (vi) owner or
voting trust (primarily for non-U.S. citizens).
Each ownership structure has unique benefits,
and some may be used only based on
application regulatory constraints. Given the
impact on public safety, the FAA heavily
regulates aviation in the United States.
Therefore, potential owners should carefully
analyze whether their intended use is
permissible under the Federal Aviation
Regulations (FARs). One factor to consider is
that the FARs prohibit charging or seeking
reimbursements from third parties for use of the
aircraft, except in limited circumstances such as
intra-company operations, time sharing,
interchange, or joint use arrangements. The
FARs also severely limit employees’ ability to
reimburse for the personal use of a company
aircraft.
Another factor to be aware of is the “flight
department dilemma,” as it is commonly called.
This occurs when an owner creates a special
purpose entity (SPE), typically a limited liability
company, solely to own and operate the
aircraft. In a misguided effort to minimize
personal liability, owners often receive such
advice from accountants or consultants, who
are unfamiliar with the FAA regulations. The
SPE’s sole pursuit is to provide air
transportation to affiliated entities. However,
according to the FAA, an SPE created
exclusively to own and operate an aircraft is a
commercial air carrier for which a commercial
air carrier operating certificate is required.
Operating an aircraft as a commercial air carrier
without the required commercial air operating
certificate could result in severe civil penalties,
and a pilot’s certificate suspension or
revocation. Additionally, in the event of an
accident or incident, such use may jeopardize
an aircraft’s insurance and financing because
such use is likely contrary to applicable
permitted use provisions of the aircraft
insurance policy and/or financing documents.
To address this dilemma, many owners either
place their aircraft in a company with an
existing business function or create an SPE that
merely owns the aircraft and leases it without
pilots to third-party lessees. The lessees then
obtain the pilots from another source. The
aircraft owner may not direct the lessee to use
specific pilots.
For many companies, perhaps the most
common ownership structure involves placing
the aircraft with a company within a
consolidated group of companies. The FARs
permit an owner to charge its parent and

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© 2014 Vedder Price
subsidiary companies for the carriage of
company officials, employees, guests, or
property when the carriage is within the scope
of, and incidental to, the business of the aircraft
operator. Many companies use this structure
because it offers a great deal of flexibility as
well as the ability to charge other companies
within a consolidated group of companies for
their use of the aircraft.
Tax Planning
Tax planning is another important step in the
acquisition process. Comprehensive federal
and state tax planning enables many owners to
significantly minimize their tax exposure.
Initially, a company would want to determine
whether a like-kind exchange (LKE) is an
option. Internal Revenue Code section 1031
permits an owner to exchange business or
investment property solely for business or
investment property of a like kind, such as an
aircraft, and no gain or loss is recognized.
A company should also determine whether it
might be able to depreciate the aircraft, and at
what rate, depending on whether the aircraft will
be primarily used for business purposes. An
owner will also certainly want to minimize state
and local taxes by taking delivery in a tax-
friendly jurisdiction and to take advantage of all
applicable state tax minimization options.
These include taking delivery of the aircraft in a
state that: (i) does not assess sales or use tax
on aircraft sales or re-sales/leases, (ii) has a fly-
away and/or a casual/occasional sales
exception, (iii) has laws favoring owning and
operating aircraft, and (iv) limits property taxes
on aircraft.
Aircraft Use Policy
Another important ownership planning tool,
particularly for a public company, is an aircraft
use policy. The primary purpose of a use policy
is to establish a formal policy by which
companies can control the use of the aircraft.
The use policy is also an ideal way to avoid
aircraft abuse and embarrassing public scrutiny
as well as shareholder criticism that typically
follows such abuse of company aircraft. Aircraft
use policies have become very prevalent after
the passage of the Sarbanes-Oxley Act of 2002
(SOX),1
which requires companies to, among
other things, establish internal audit procedures
and certify business aircraft use perquisites
granted to executives in annual reports and
proxy statements. In enacting SOX, Congress
wanted to increase transparency for
shareholders and thereby eliminate corporate
abuse.
As a result, an aircraft use policy is an ideal tool
to increase transparency because it enables
companies to develop a comprehensive policy
regarding the use of the aircraft, which should
eliminate any potential corporate abuses. An
aircraft use policy should identify the authorized
users of the company aircraft and whether the
aircraft may be operated for executive personal
or entertainment use. The use policy can also
establish whether the aircraft may be employed
for other unique uses, such as humanitarian
relief missions or to support political candidates.
The policy should also include the scheduling
process, guidelines for limiting which key
executives may fly together, and use priority
based on the greatest need of the company.
Most policies contain guidance for personal
use, including whether reimbursement is
permitted, assuming a time-sharing
arrangement has been established. Use
policies should also make clear how much
income should be imputed to passengers and
the aggregate incremental cost of the
transportation provided, assuming the value of
the transportation must be reported to the SEC
as a perquisite. A comprehensive policy should
provide guidance for family members and
guests accompanying employees on business
flights, including how to appropriately value
their presence on the aircraft from an IRS or
SEC perspective.
Other items that may be included in aircraft use
policies are international operations guidance,
media relations in the event of an accident or
incident, security procedures, and whether
third-party charters may be used for additional
air transportation. Finally, most aircraft use
policies are reviewed and adopted by a
1
Pub. L. No. 107-204, 116 Stat. 745 (enacted July 29,
2002).

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© 2014 Vedder Price
company’s audit committee with significant
input from key stakeholders within a company.
Operational Plan
Companies have two basic options to operate
their aircraft. They can either establish an in-
house flight department or outsource all or
some of the necessary flight department
functions to a professional aircraft
management company. Many advantages and
disadvantages exist with each option. For
example, some companies may want to avoid
the costs and regulatory and administrative
burdens associated with hiring pilots,
mechanics and all the related support
personnel, while others may prefer the control
and flexibility associated with an in-house flight
department. Alternatively, some companies
may simply want a turnkey operation and
outsource all the necessary operations and
maintenance to a professional aircraft
management company. Most aircraft
management companies are also FAA-
certificated air carriers that operate a fleet of
aircraft for other aircraft owners. Some
management companies can charter the aircraft
to third-party charter customers, providing
owners a modest revenue stream. The
decision to use a management company or
establish an internal flight department requires
careful consideration. Indeed, it is not
uncommon for companies to start with one
option and after a few years switch to the other
option.
Conclusion
Acquiring a business aircraft is complex and
requires a significant amount of planning. This
article provides a summary overview of the key
considerations. Given the many variables
associated with acquiring a business aircraft, it
is wise to have a team of professionals assist
with the process, as with any major capital
expenditure.
For additional information, please contact:
David M. Hernandez
(202) 312-3340 | M: (202) 403-1678
dhernandez@vedderprice.com
www.vedderprice.com
About Vedder Price
Vedder Price is a general practice law firm of
approximately 300 attorneys with offices in
Chicago, New York, Washington, DC, London,
San Francisco and Los Angeles. Vedder Price
enjoys a world-class reputation in key practice
areas and serves clients of all sizes in virtually
all industries with a responsive, results-oriented
and cost-effective approach.
Vedder Price’s Global Transportation Finance
practice group, with 50 professionals in
Chicago, New York, Washington, DC, London,
San Francisco and Los Angeles, is one of the
largest, most experienced and best-recognized
business and commercial aircraft practices in
the world.
Vedder Price is able to provide counsel in all
aspects of business aircraft transactions. You
can expect to work with attorneys who are
recognized for their legal acumen, transactional
skills and business aircraft industry leadership,
and who are also able to leverage the full
resources of Vedder Price to provide
sophisticated regulatory, operational, tax and
other practical guidance and assistance,
including synchronizing these considerations
with finance and leasing transactions.
Vedder Price P.C. is affiliated with Vedder Price LLP,
which operates in England and Wales, and with Vedder
Price (CA), LLP, which operates in California. For further
information, please refer to www.vedderprice.com. 222
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Price communication should not be construed as legal
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