Buying new in Europe

“Diamonds may be somewhat a different story because they are mainly used by flying schools, I think.”

While flight schools do use Diamonds because they are very robustly built and have an outstanding safety record, I know quite a few private owners who chose the DA40 over other mainstream 4-seater planes as their first plane. I am one of them.

I have bought a DA40/G1000 in 2009. It served me well, gave me 140-145 KTAS cruise with excellent fuel economy and I think it saved my life a couple of times when I did stupid things in the pattern. The very advanced avionics suite also contributed at least one additional “save” from a midair.

DA40s have been depreciating a lot lately. I believe that a key reason is the flood of used Cirrus SR22s which have lost enough value to slip into the used DA40 price bracket.

Unless you get a terrific discount on a new plane, I think you are better off paying 40-50% less than list price for a well cared for plane made after 2007 (this is when the last significant technological change happened: WAAS-capable avionics.

Peter wrote:

Hence every country will have some similar rule otherwise everybody with an expensive hobby would set up a company, buy the stuff, apply the maximum capital allowances, and then sink the company, repaying the VAT on a much reduced market value

What’s wrong with this?

Nothing except that nearly everything we buy in our lives (except maybe houses) loses nearly all of its value pretty fast, and if it were possible to use that to avoid taxes, a lot of people would be avoiding taxes.

Especially if you could use the capital allowances on a [mostly] privately used aircraft to reduce the taxable profits of another business which you own. That is another no-no which gets the tax people really excited. In theory it is (in the UK) sustainable only with a plane which is used 100% for the business.

Peter wrote:

Nothing except that nearly everything we buy in our lives (except maybe houses) loses nearly all of its value pretty fast, and if it were possible to use that to avoid taxes

I agree, but I think if it works for you there are some exceptions with careful selection. For example there are many cars that will hold there value or even appreciate – light use accepted. Some vintage aircraft will do the same. Of course you will do very well indeed to enjoy appreciation that also covers the running costs. However in times of low inflation you are much more likely to get close. A friend purchased an old Aston about 6 years ago, has done a few thousand miles a year, and it is worth more today than he paid, taking in all his costs over the period. Not a bad achievement. I reckon right airport, right aircraft, you could run a twin these days, and if you hire it out enjoy some free flying for four or five years. Of course this would never been achievable with most “modern” aircraft.

Rwy20 wrote:

To me, accelerated depreciation sounds like a “buy now, pay up later” deal, because when you sell the aircraft you’ll have to make up for whatever difference there is between the value and sale price anyway.

For example, in the Czech Republic, aircraft should be in the same group as cars as far as depreciation deductions go, meaning you have to depreciate it over at least 5 years. And generally you can choose between uniform and accelerated deductions, I believe aircraft are not an exception (perhaps surprisingly the first year doesn’t offer the highest deduction in either case but I won’t go into details). But this is something you can do only for business. If you use it also privately, you can deduct only an appropriate portion of the cost (well, you’re supposed to anyway; you can get away with it on an oscilloscope for example, but they do check cars, especially when you ask for all of the VAT back, so I imagine they would check an aircraft given the value). I believe the difference between accounting value and what you actually sold it for is simply treated as profit (I’m not an accountant nor tax adviser).

Rwy20 wrote:

In addition, I think several states (like Nebraska) have passed exemptions to sales tax on new planes.

Yes, that would be an advantage. But they’re at an advantage either way. I believe their sales taxes are substantially lower than your typical EU VAT. I sure would love it if we had something like 5-10 %. And you might be exempt from sales tax if the aircraft is exported (which would be relevant for us). However, an American has to beware usage tax or whatever it’s called (unless he lives in Nebraska, he might have to pay anyway).

I know a little bit about this and I never saw anything that would knock my socks off so I was curious what you meant. I do envy the low rates. But there are disadvantages as well. Imagine paying a tax when you move to a different state from your possessions which you bring with you.

In the UK, you can apply capital allowances of 40% a year of the residual value. This reduces to 25% if the asset is being rented out (!!).

However, the application of capital allowances, which is obviously done to create a tax loss, is of no value to anybody unless the loss can be used against profits elsewhere. And that is the thing you can’t do just by buying a plane via a company. All you are doing is creating work for yourself, preparing and filing accounts, etc. For sure, with any new/new-ish plane the capital allowances will wipe out all possible profits resulting from rental, but what can you use this for?

The only useful avenue I see is setting up a VAT registered operation to reclaim the purchase VAT and then shut it down some years later, thus saving the VAT on the difference between the purchase VAT and the VAT on the MV of the plane when the company is wound up, but the taxman won’t let you do that (in any modern country) if there is no real business going on. The standard measure of a “real business” is renting out the asset “at arm’s length” and that includes renting it to yourself as the same hourly rate etc.

Here is an example of a 500k plane written down over 5 years

The obvious problem is that the MV will be a lot more than 118k! Even for a Cirrus… so the VAT saving will not be much.

As I wrote before, I gain the option of selling the plane with VAT. Meaning the buyer can potentially claim it, which makes my plane more competitive on the market. Otherwise I might end up eating the whole VAT. It also means having less money tied up in the asset.

And indeed, in the US, you probably won’t be allowed to use those deductions against profit from other activities unless you actually make it a viable business in its own right (different states have different rules but it should hold in general).

Rwy20 wrote:

Many pilots seem to buy their plane through their business there, to use it for transportation. In that case, I am certain that you can use the depreciations to lower your businesses’ taxable profits.

And I can do so as well. The issue is having legitimate business trips that would benefit from an aircraft. And if I use it both privately and for business, I’m expected to deduct only a portion corresponding to business use. The same goes for VAT. If I fly 50 hours per year for business and 150 hours privately, I can claim only 25 % of the VAT and deduct only 25 % of the depreciation. It should also extend to any maintenance, upgrades, etc. It’s fair. But it means you can’t use toys to lower your taxes. PS: Well, not toys where it’s fairly easy to check how you use them. I can buy quite a lot of electronics, software, etc. and justify the deductions. And they would have hard time proving to what extent I’m using them privately.

Are you saying they can deduct the full depreciation while using the plane privately?

http://www.avweb.com/blogs/insider/Why-Aircraft-Sales-Are-So-Grim-228025-1.html

This has appeared on Avweb, taken from a podcast by Teal Groups, Richard Aboulafia, Some interesting data, particularly the reference to the dire condition of Europe.

I particularly liked this comment posted by a reader

Quote Now that the market sees flying as just another form of transportation, It’s no longer worth the effort or expense. You can get a boat and a motorcycle for less that the cost of a pilots certificate (and use them pretty much with zero regulation).

Are New sales that grim? It would appear to be