If your company finds it more advantageous to purchase aircraft rather than to lease, an aircraft sale leaseback may be an option.

  • Many factors affect the decision to enter into an aircraft sale leaseback arrangement.
  • A sale-leaseback gives you greater flexibility to control the tax consequences of your aircraft operations.
  • It can also provide a method of financing, free up the equity tied up in the aircraft, and improve your balance sheet.

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:

  • Sale-leaseback is a method of financing. If your company needs funds, your aircraft can serve as collateral for the loan via a sale-leaseback.
  • Sale-leaseback can free the equity tied up in aircraft. Even if there is no pressing need for funds, a sale-leaseback allows you to use the equity tied up in your aircraft in a more productive fashion.
  • Sale-leaseback can shift the risk of resale. Since you are the lessee rather than the owner, you will not bear the risk of trying to sell what may become an obsolete asset. Note, however, that leases also can be written to vest ownership in the lessee at the end of the lease or to give the lessee an option to purchase, should that be desired.
  • Sale-leaseback can improve your balance sheet. Sale of the aircraft can remove the debt that encumbered it from your balance sheet. If your leaseback is a “true lease,” you will not have to account for the lease obligation as a debt on your balance sheet.

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.

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. It is not designed or intended to provide financial, tax, legal, investment, 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. 

Contact an Expert