Legal Question in Tax Law in Texas

Aircraft - Section 179 Deduction

Hi,

I am a full-time employee and currently, nearly all of my income (95%+) is in the form of wages. The balance consists of dividends, interest and capital gains.

I am contemplating starting a company to develop and sell computerized flight instruments and engine/fuel management systems for experimental aircraft. I expect a 2-3 year R&D period and no profits until year 3 or 4.

Doing this will require that I purchase an aircraft (a /relatively/ inexpensive one - in the $40-50k range) and rent a hangar. Operating costs will be about $40 per hour on an ongoing basis for software refinement & testing - perhaps 250 hrs/yr). I expect to also fly 20% (or so) of the time to go buy expensive hamburgers in exotic locations like Tyler and Austin (i.e., personal use).

Questions:

1. Can I take a section 179 deduction for the purchase price of an aircraft under these circumstances?

2. Must it be written off against business income -or- can it be written off against wages earned at my completely unrelated job (it's a programming job, but not aviation-related)?

3. Will I be able to deduct the hangar and operating costs as normal business expenses, again against wages, not business income?

Thanks!

-mdr


Asked on 4/19/06, 9:07 pm

1 Answer from Attorneys
Barbara Lamar Law Office of Barbara Lamar

Re: Aircraft - Section 179 Deduction

In the absence of special treatment for R&D expenses, start-up expenses, and organization costs, you would not be able to deduct your expenses during the development period of your business. The reason is that you would not be considered to be in a trade or business until you're actually in a position to begin marketing your product. The initial expenses would have to be capitalized.

It sounds as though the initial work you'll be doing may qualify for special treatment. A complete discussion of R&D taxation is way beyond what I can write here, but I'll refer you to the IRS web site for some basic information:

http://www.irs.gov/businesses/small/industries/article/0,,id=97640,00.html

(sorry I can't make this a hyperlink -- I don't think I'm allowed to use HTML in this text box)

Of the expenses that do not qualify as R&D expenses for tax purposes, some will qualify as start-up costs or organization costs. A portion of these can be written off and the remainder amortized.

I'm giving you a very basic, overly simplified version of the law here. Please feel free to contact me for an appointment to go into this in greater detail. You can get my contact info from my web site at http://www.tax-lawyer-texas.com/

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Answered on 4/20/06, 1:47 pm


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