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Many companies find it more advantageous to purchase aircraft rather than to create a lease arrangement. However, should their objectives change, aircraft owners can become lessees through a sale-leaseback arrangement.
Under a sale-leaseback arrangement, the aircraft owner sells the aircraft to the lender or lessor who then immediately leases the aircraft back to the original owner. There will be no interruption or disruption of aircraft operations, but the transaction should give the company some extra cash. There also may be changes concerning taxes and the way in which the aircraft is accounted for on the company's balance sheet.
Why choose a sale-leaseback arrangement?
There are several reasons that sale-leaseback might be attractive to a company:
A sale-leaseback gives you greater flexibility to control the tax consequences of your aircraft operations. As an owner, you can deduct depreciation and interest. As a lessee under a "true lease," you can typically deduct the entire rental payment as a current expense. Leasing may help reduce or avoid liability for Alternative Minimum Tax because leasing generally does not generate tax preference items.
But if your tax situation is such that the deductions available to owners would be preferable, the leaseback can be structured as a capital lease. Under a capital lease, you should be able to take the same deductions that you would take as an owner. However, under this leaseback arrangement, the aircraft and corresponding debt would generally need to be reflected on your balance sheet.
Is an aircraft sale-leaseback right for you?
Many factors affect the decision to enter into a sale-leaseback arrangement. Among those factors are potential tax advantages, the company's need for cash or desire to re-deploy the equity of the aircraft more productively, advantages that may accrue from removing the aircraft and corresponding debt from the balance sheet, and the company's desire to hedge against obsolescence of the aircraft. A qualified professional can help you evaluate whether sale-leaseback can provide an advantage to your company.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.