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[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].[Music].you.you.you.hello and welcome back to AOPA pilot.Information Center livestream webinar.series our topic for this episode is.leasing to an FB o I'm Ferdie Mack with.the pilot Information Center thanks so.much for joining us this is episode 3 of.our three-part series this year on.aircraft ownership part 1 oz on.co-ownership back in May and in July we.covered LLC's in part two in this.episode we will cover aircraft lease.back in particular the legal and tax.considerations this webinar is brought.to you by AOPA pilot protection services.for more information on how we can.provide you with aviation related legal.and medical assistance you can visit the.PBS website at wwlp.com.by using the red subscribe button below.the video also during the live.presentation this evening you can send.us your questions in the chat box just.to the right of the video we will answer.the most popular questions at the end of.this hour-long presentation also if you.are not watching this live please feel.free to contact us with your questions.at 808 72 to 672 that's 800 USA AOPA.Monday through Friday 8:30 a.m. to 6.p.m. Eastern Time or you can email us at.pilot assist at AOPA org joining me.again today is Ray speciali ray is one.of AOPA pilot protection services staff.attorneys as well as a CPA and a CF.double I which I neglected to mention.last time I apologize for that and Ray.is well versed in applying all of those.skillsets simultaneously in the aviation.domain.welcome back ray thanks a lot for a good.evening everybody great to see you.alright it's the rain let's get started.so I the other day was scratching my.head after talking to a friend of mine.or maybe the owner of the flight school.where I rent and was thinking maybe I.maybe I already own an airplane maybe I.don't but I think I've come up with a.way to read not only reduce my cost of.flying but maybe I'm the first one to.figure.maybe I can make money with this.depreciable asset I'm gonna lease it out.have other people pay to fly it that's.this whole leaseback idea right so why.don't we get started with some of the.highlights of how we're going to try to.explain this lease back deal to our.members the same thing sure and that is.going to be the focus of this evenings.discussion and just to make sure that.everybody's straight on the terminology.when we talk about a lease back it may.not be technically correct in the sense.that a lease back really means that.you're purchasing an asset like an.airplane and then you're going ahead and.actually leasing it back to whoever sold.it to you for various reasons in the.case that we're discussing this evening.we're really talking about specifically.a lease of an aircraft to an FBO.or flight school with the intention as.furedi said of generating some revenue.the whole point of this three-part.series has been how can an aircraft.owner go about trying to defray some of.their expenses of aircraft ownership and.this is really the third of that.three-part series and this is a very.viable approach but there's a lot to it.and that's what I intend to go over.tonight with everyone you've already.done a great job of taking my semi.hyperbolic language of make money to.generate income and you've also brought.in the much more common parlance of.we're going to find a way to defray the.cost of ownership potentially and that.is a very valid reason to do this but.and we'll talk about this a little bit.later you've got to really be in this as.a business it's got to be looked at as a.business and the way that I want to.approach this tonight and this is really.the the outline of the discussion is.going to be the first talk a little bit.about some of the typical pros and cons.of a lease Beck and again when we use.the term lease back we're talking.specifically about an aircraft that's.being leased to a flight school or an.FBO or through a flight school or FBO.once we do that.- take a look den and this is important.at the actual agreement that you would.enter into with the flight school or FB.oh that's an important part of the deal.right that's the arrangement we're also.going to take a look and this will take.a little bit of time at some of the.income tax issues that is often an.important consideration and folks have.to be mindful of that before they get.started so that they can fully.understand what this deal may bring to.them will also shift into a little bit.related to sales and use tax issues.because that does become a factor as.well finally I'll you know try to.reflect on this with you maybe at that.point we may have some questions.streaming in just some general.reflections on what you should be.considering from a 30,000 foot view as.you think about whether or not this is.going to be for you and then finally.with time permitted we'll try to get to.some of the bigger questions that are.coming up so let's go ahead and get.started with respect to advantages of a.leaseback.as I said a little bit earlier one of.the key advantages as disability to.defray and share the cost of aircraft.ownership if you think about it and what.we will often see is an individual.aircraft owner might not really be able.to fully utilize their aircraft if.they're flying at 50 60 hours which.frankly is what I often see they may be.thinking well you know maybe there's a.way that I can still get to use it but I.can also defray some of my expenses by.having others use it and pay for that.use as well so that is in fact one of.the primary reasons people would get.into a leaseback and another good aspect.of it and this really ties in to.somebody getting low utilization of the.aircraft is that I'm the way MP mechanic.but what I hear more and more from.mechanics is you know it's nice to get.that aircraft out out of the hangar away.from the tide.get it out get it flying it's better for.the machine you know some of the engines.that I've seen opened up at overhaul.time at some of the places of where I've.worked where those engines have run.their 2000 our lifespan in 3 4 5 years.those are some of the nicest cleanest.looking engines inside you know you.might think they've been run run hard.and run all the time and as a result.they're going to look more worn when in.reality they're better taken care of and.they require less replacement parts that.time overhaul that's right it is a.factor and something that people will.often need to consider as they go.through this that the greater use may.actually be better through that engine.better for the aircraft absolutely now.some of the negatives right that you got.to be aware of as you go into this and.they do tie very directly to the.positives is you know the flip side is.you may not be able to use the airplane.anytime you want that's that is a.negative right there is going to be.limitations to that because if you're.really running this as a business other.folks are gonna have the same.opportunity to use it as you might and.that will limit the availability of the.aircraft to you greater aircraft use can.be a positive as I just said but it can.also be a negative and often the.negative when it comes to lease backs.that I hear about anyway and I'm sure.everybody's got their stories it's just.some of the cosmetic things renters who.don't take care to clean out the.aircraft sometimes it's more than just.cosmetic sometimes you know it's hard.landings other things that might happen.especially if they're training primary.students on your aircraft so there is.that flip side that we can know we can't.ignore it can be a negative in some.instances and finally you know and and.there are more cons and there are more.pluses but one other is that for better.or for worse when you get involved in.one of these things you got to deal with.people like me right you got a higher.often a lawyer an accountant to get this.up and running and often you'll need a.CPA on an annual basis to keep you in.compliance right.file tax returns to at least assist you.with this part of your tax return so.that's a cost that needs to be factored.in as well and as you get going with.this you can't ignore it so let's let's.take a look now though at some of the.ingredients to a good deal right and.when I say good deal I mean one that's a.solid deal that is as clearly laid out.as possible between you as an aircraft.owner and a flight school or FBO so some.of the top-line things some of the.things that you have to first of all.think about is what is the deal how does.this work and this slide really reviews.that again from a very high level what's.going on in one of these aircraft lease.back Arrangements typically you've got a.FBO or flight school and usually they.don't want to buy their own aircraft for.better or for worse the model that.creates less risk for them is going to.be a leaseback model where they are able.to make use of someone else's asset.right they don't have to have skin in.the game right it is often difficult for.them to raise enough capital or to put.that or make that part of their business.model right so they're gonna prefer this.model and in many cases it'll work for.both parties so first of all it does.typically involve that kind of an.enterprise you're gonna also be looking.at a deal where there's a revenue split.you could see that as the next point on.the slide where normally the FBO or.flight school as a result of this is.going to probably retain about 20%.that's usually what I see sometimes we.see 25% I'm sure there's lots of other.deals out there but that is by far and.away the most common kind of arrangement.we see where the FBO or flight school is.going to retain 20% of the gross revenue.the rest of it the remainder 80% for.sake of this discussion we'll pass to.the aircraft owner and then finally and.this is a big.right you're 80% is going to be used to.pay for some of the big items that.typically will come up with any aircraft.right maintenance hangar surance.tie-down whatever normal cost would be.associated with ownership that's what's.going to come out of the 80% now what.will also happen is normally you will.get either a check at the end of each.month that will include the remainder of.that 80% after all of those expenses.have been paid or it is possible that.the expenses have exceeded the revenue.and you will be writing a check your.airplane might not be flying as much in.the winter and what if that happens to.be when your phase 3 or annual.inspection falls or even a hundred hour.that's exactly right and that's one of.the reasons why and I'll probably.mention this more than once tonight if.you're thinking of doing this because.you are not going to be able to afford.the debt service on an airplane wise.yeah stop don't do it all right this is.not going to be for you you want to be.able to know that you can cover debt.service you can cover the other expenses.related to this aircraft both fixed and.variable without the need for the.leasing revving right so maybe it's.February and maybe it's snowed all month.it happened you've got no variable costs.associated with the aircraft because it.hasn't moved but you've still got your.monthly insurance you've still got you.to pay the note on the aircraft and you.know those things don't go why the tie.down or you know however you're.physically locating it those those three.fixed costs alone you know that there's.a there's a four figure check you're.gonna have to write with no income that.month off right though those costs are.gonna be used oh you you have to be.prepared for that and again it's not a.good idea to get involved in one of.these if that's going to be your way to.pay down debt service and pay for all.these other expenses it typically won't.work now that's the sort of higher level.look at what the deal.is gonna be now I just want to spend a.little bit of time going through what.I'll call the key ingredients to a.leaseback agreement the agreement.between you and that FBO or flight.school and I'm certainly not covering.every single one of the points that.would need to be covered I'm just trying.to highlight some of the main points.some of these might seem pretty obvious.but I want to make sure that what we're.covering it first of all you want to be.able identify the aircraft and the.aircraft owner right if it's an LLC.you'll want to say the LLC that's.running into the deal with the flight.school or FBO and you want to clearly.identify the aircraft the next one is.actually more important than you may.think the term and termination I find.this often to be the most important.aspect of the deal with respect to the.term you're usually gonna see a year.deal a 12-month deal but that means this.is how long the revenue-sharing and all.the other aspects of this Agreement are.going to go the termination clause in my.mind is actually even more important you.want to know what it's gonna take I hate.to say this because you're just starting.the deal right but you want to know what.it's gonna take to get out of this deal.and the way that I like to look at this.is the easier to get out actually for.both parties the better I have found.over the years and this is just my.observation you may hear other opinions.on it but that if you've got a for.instance a nice 30-day out no cause you.can get out for any reason the FBO can.get out for any reason.I think that's typically going to be.better for both parties you want that.ability to move in and out to move out.of the agreement with a lot less fuss.mm-hmm so anything more than 30 days you.better think about and you better think.about what's gonna happen if things are.not going the way you would like them to.go so this was actually enlightening to.me not never having been part of a.leaseback arrangement before I love the.comfort that this idea provides us.as the the termination clause on the.term side however let's say things are.going well we get to let's say a month.11 of a 12-month term what steps have to.be taken in order to renewed we just.print out a new copy of the same form if.we find it agreeable put new dates on it.and sign it or is there more to it um it.actually can be as simple as having a.clause in the agreement that says that.if you don't do anything it will.automatically renew in a month on a.month by month basis right that's and.maybe the terms of the agreement will go.on for another year so it is something.that needs to be attended to because it.could be that it terminates and then you.got to go ahead and put together a new.agreement but usually I see an auto.renewal in there makes it a little bit.easier it creates a little bit less.stress but again the termination the the.ability to get out in an easy way.without any acrimony if there's no fault.right that needs to be attached that's.usually the best way to go and you would.also mentioned in a rehearsal the idea.that the agreement would attack -.perhaps not just on the FBO side a.particular company but maybe a.particular group of people in that.company so that if the well we're going.to talk about that when we get to.leasing and subletting area we're.signing the agreement great because.there it does become important you know.who you're dealing with you might be.dealing with a corporation that is.running that FBO or flight school but.you're really dealing with the people.who own it and so we'll get to that if.in case the FBO or flight school should.change hands what's going to happen if.they are looking to assign your lease.right to the new owner we'll talk about.that in a few moments you also want to.deal with aircraft use you may not want.your aircraft use on a grass strip or.shorter strips or gravel strips you may.want to confine it's used to certain.geographic areas the insurance policy.we'll talk about how that works a little.bit later is going to also perhaps have.some constraints there so that needs to.be addressed you also will want to lay.something in there about your use of the.plane.this is my own feeling about it my own.experience with it but you want to draft.this up with the thought in mind that.somebody's gonna be looking at this.something and that somebody could be for.instance an IRS auditor right and my own.preference if you want to really be able.to treat this and say that you're.treating this as a business and you'll.see the importance of this a little.later.it's been my view that you get the same.Terms of Use you get the same kind of.scheduling preferences as anybody else.gets you're just another renter I know a.lot of you may not agree with that.I you know that's just my own experience.I've always felt that that works best.you're gonna pay the same amount you're.gonna get on the schedule the same way.as any other renter and and I found that.to be the best way to do it so not only.does the owner not necessarily have any.scheduling priority a preference.explicitly stated or implicitly given.but also they don't have any of the.scheduling rights you know they're not.the scheduling authority often they're.not anyway right it's the schedule is in.the hands of the FBI or flight school.there may be some rare instances where.they do deal with that directly but that.tonight with the time we've got I'm only.talking about the typical case where the.school is the one that handles the.scheduling so again my opinion my.preference has been to have owner use.laid out and in a way that it doesn't.necessarily give any great preference to.the owner none above what any other.renter might get a couple of other.things that you know you might want to.include in there that I'd like to see in.some of them sometimes these FBOs or.flight schools might have several.locations you want to make sure that.aircraft basing is laid out very clearly.there which Airport might even be that.there's a particular hangar you're using.that you want to lay out there and the.agreement as well other revenue sharing.percentages need to be clearly stated in.this agreement again normally they're.80/20 but depending on the.they could be slightly different than.that maintenance this could be important.manok there are times when the FBI or.flight school may have their own shop.that they'd like it to go to and they.may give you a better deal when you go.there some kind of a discount but there.may be times when you might want to.override them you might want certain.work done somewhere that you have chosen.that you have authorized so in this.particular section you might want to say.something like look if the work is going.to be more than X dollars I want to be I.want to be notified first and I have to.give my written permission or my verbal.permission in order for the work to be.done that's something that protects your.interest in to some degree even protects.the FBO said they're not blindsided when.you say oh I didn't authorize that I.didn't want you to do that now what do.we do yeah what do we do right that is.often the cause of friction so that to.the extent possible needs to be laid out.as carefully as possible and.interestingly enough when it comes to.maintenance and deciding where the work.should be done we're in an interesting.era now a OPA has done some some.maintenance investigative work regarding.some of the newer ATSB installations.some of you know the more complicated.install jobs can and or should be that.performed by an actual radio shop but.some of the other more simple installs.that are designed to be done with.minimally invasive techniques can be.done by an A&P at your at your regular.mechanic shop as opposed to going to a.radio shop so right there that's a good.example of right now there's a.crossroads for aircraft owners where.they could be surprised if their shop at.their FBO or flight school attempted to.do the ABS be installed where the owner.may have Adam misconceived notion or an.expectation that was accurate that it.should have gone to radio shop so that.that I can see that playing out right.now point being there are certainly.cases where miscommunication or.misunderstanding there.not being codified in the leaseback.agreement you know you just don't want.it it can cause some heartburn yeah and.these agreements will not cover.everything and it you want to try to.cover as much as you can but it's always.a good idea to lay out the general.framework and something like that can be.avoided without too much trouble a.couple of other things that you might.want to see in the agreement again I'll.call them you know sort of key.ingredients besides the insurance is.another one that's a big one more often.than not what's going to happen is that.the aircraft is going to be placed in a.commercial policy that is part of the.FBO flight schools fleet policy so.that's gonna be important you're gonna.want to check what kinds of limits.they've got what kind of sub limits are.on that policy you're gonna want to make.sure you individually and your LLC or.whatever entity you might have it in are.named as insured on another note you.want to make sure if you can that the.FBO or flight school is insisting and.checking on the renters to make sure.that they have gone ahead and procured.some kind of rental insurance because.that will be most helpful in the.unfortunate case where there's an.accident there's a deductible and that.renter needs to pay for the damage that.was done but through the deductible.that's right exactly and so those.renters policies are something that a.lot of flight schools and FB FB o--'s.will insist on you may want to insist.that they insist on it in your agreement.sometimes it's hard to force compliance.with that but it's certainly worth a.discussion and it's certainly important.for you to understand that there are.deductibles on those policies and you.want to make sure that your exposure is.understood right so what's going to.happen there we have an unfortunate.landing situation the aircraft is.damaged fifty thousand dollars of damage.needs to be paid work needs to be paid.out and will be paid up by the insurance.company the insurance company has a.policy in place with the owner.they're ready and willing to pay that.that $50,000 amount to make the aircraft.operable again but there was a.deductible say $5,000 the insurance.company wants that deductible before.they'll pay the claim insurance company.starts looking for the deductible to be.paid who do they end up coming to our.hapless renter who was the one who.actually performed the act of piloting.in question that caused this whole.scenario in the first place and if that.renter had secured an unknown renters.policy before I think they're going at.the base rates these days for around.$200 a year depending on they're pretty.inexpensive right that would have.covered that $5,000 deductible coverage.potentially that otherwise may have to.come out of the renters pocket right and.if you're the owner you do not want to.have to go after the renter for that.it's not easy and it's a lot better to.make sure they've got a way of funding.that kind of exposure early on right so.that's something else that can be.discussed with the FBI or flight school.to make sure that you've got as much.coverage as possible I know it's a.little bit down the weeds as far as you.know now we're talking about the renters.interface to this leaseback agreement.but you know it's it's worth talking oh.it is you can understand from the.aircraft owners perspective as the one.who's providing this lease back aircraft.you know what what is at the other end.of that pipeline exactly some of the.other things last few items on the.actual document itself and this seems.very obvious but you want to make sure.that you are clearly stating that this.is your aircraft right well seized.aircraft or whatever kind of entity you.might have out there and that the FB or.flight school may not do anything that.will cause a lien or an encumbrance to.be placed on your aircraft right that.should go without saying but you want to.make sure I think that it that it's.certainly mentioned in the agreement.Ferdie this is what you were mentioning.a little bit earlier assignments and.subleases at the end of the day you're.dealing with people at the other end of.this even though it might be an ant.that you're really working with from a.legal perspective so if that's like.school or FBO changes hands you may not.want them to be able to just go ahead.and the sign that lease or sublease your.lease back arrangement to somebody else.and and that means writing it into this.agreement and normally what you could.say is that if they're going to go ahead.and assign the lease to another flight.school or even if the ownership of the.current entity changes enough that could.be considered an assignment and.therefore that would require your.approval before it can continue worth.looking at and worth making sure that.you're comfortable with that finally.sort of the unpleasantries of if there.is a dispute right you want to make sure.that you've got something in there that.talks about how you want disputes.resolved some folks would prefer to.bring these kinds of disputes to.arbitration some will just simply say if.there's any dispute we're gonna bring it.to the local Circuit Court or district.court or whatever it might be in your.jurisdiction it may also be worth it to.lay something out in there that says the.prevailing party will be entitled to.attorney fees you'd be surprised.sometimes that's sometimes that's a way.to suppress the desire to litigate right.if somebody's thinking that well now I'm.gonna be on the hook for lawyer fees if.I'm the prevailing party and then.finally you'll also want to mention what.governing what will be the governing law.right what state law will in fact govern.the deal sometimes this is important.especially if you're not in the same.state as the FBO or flight school so you.want to be clear on that so you know.which court you're going to write if you.have to do that eventually and what.states laws will apply to your.particular case get your coffee that's.right you're gonna need it now because.we're about to talk tax double-shot.that's right all right so here we go.but this is as mundane as it might be.it really is an important part of the.discussion I think there are some.misconceptions out there about this but.people need to go into lease backs with.their eyes open on the tax the income.tax implications to an aircraft lease.back so to start things off we're gonna.take a look at some tax basics all right.and this doesn't just apply to lease.backs this applies to everything since.about 1986 when they did the last big.tax reform and right up the the IRS has.recognized what I'll call three buckets.of income and this is important you'll.see in just a little while because we.got to be able to classify income in.order to understand how it's going to be.handled the first bucket is probably the.most prevalent that's where most of us.get our income from right that's going.to be ordinary and earned income so.again that's the kind of income you get.from your business from salaries from.wages so that's bucket number one the.second bucket that we're familiar with.is what we call portfolio income and the.IRS looks at portfolio income as a.separate item and this would include.things like dividend interest capital.gains the third bucket which is often.something that needs to be thought about.in the term when you're in the context.of an aircraft leaseback is passive.income and this is typically attributed.to items like rental income and guess.what we're talking about right leases.and activities where someone doesn't.materially participate and we'll talk.about what that means in a little while.but specifically this passive income.bucket needs to be looked at carefully.in this context and why well there's a.couple of rules we need to talk about.now that do relate specifically that.they relate to a larger context of.things but in the context of aircraft.lease backs they're important.and the first rule is really the at-risk.rule and what this basically says is.that your losses on any activity can.exceed the amounts that you are at risk.for and what do we mean by at risk well.I'm going to oversimplify it a little.bit but it could be as simple as the.amount that you put into the initial.investment so for instance if you bought.$100,000 of Cessna 172 to put on the.flight line at the local FBI or flight.school and you paid cash for that 172.you were at risk for a hundred thousand.dollars that's you're at risk amount to.get started if you add to that over time.with avionics or other improvements you.can add to your at risk the second rule.and this is one that really needs to be.understood is that if we're talking.about passive activities and rental.activities and we'll see this a little.while come into play here passive losses.can't be used to offset ordinary or or.portfolio income and this comes from.Internal Revenue Code section 469 if.there's any CPAs or attorneys listening.out there but the key here is you can't.use passive losses to offset buckets one.and two and then finally and this one to.some degree is a kicker if you're.engaged in a rental activity it is.presumed to be a passive activity unless.certain exceptions apply so as you start.processing this you should be thinking.oh my gosh it may not be so easy to.deduct losses from this activity if I in.fact run into losses because if their.passive losses by the very nature of the.fact that this is a rental activity and.I've got these losses I can offset my.ordinary income or my portfolio income.with this.I'd need other passive.activities before I could go ahead and.use those losses and you'd be right.that's the fundamental issue that you.need to deal with as you consider the.tax consequences of an aircraft lease.pack so let's get into a little bit.further as if that wasn't enough all.right so there are certain ways that you.can under the regs okay where a rental.activity could be treated as non passive.all right so here we go the first of.these exceptions is what I'll call the.seven-day and by the way these are not.all the exceptions that are out there.these are just some of the more common.ones that might work.and I'll say right from the start they.generally don't work necessarily.tried-and-true but the ride they've been.tried or they right and and so I want to.go over them with you just to lay the.groundwork for this but the first one is.the seven-day exception we'll call it.and basically what it means is that.customer use in this case of your.aircraft is typically seven days or less.which basically means people are using.it on a short term basis and you could.be thinking oh that's great the.customers who use this aircraft are.typically using it for an hour or two at.a time right they're logging in the hops.time and moving on and another customer.comes in so that's the first exception.the next exception is you know a another.test that's really a defined business.hour test if you think about it that has.some attraction to right the flight.school or FBO is keeping the aircraft at.its place of business people can use it.during those defined business hours so.again maybe this has some appeal maybe.this is a way to deal with the rental.presumption we'll talk about that keep.that in mind that one has some potential.your customers or the customers using.the aircraft are getting it during.defined business hours and then finally.there's a catch-all which I have not yet.seen attempted so I really couldn't.comment much on its viability and that's.the facts and circumstances test but I.will say this for that one you do need.to still have very heavy turnover on the.aircraft so what's the problem you're.saying well these seem to be workable.right they seem to be workable because.my aircraft is going to be used on a.very consistent basis for short term use.right we're gonna be renting it out for.now or two at a time it's going to be.there during defined business hours.the problem is defining who is the.customer all right.and what we've got are a couple of cases.that have created problems and they're.both published tax court cases and in.both of these cases the Tax Court has.decided that with leases to a flight.school or FBO under the particular facts.and circumstances of these cases that.the customer was not the renter the.customer was the FBO or flight school.that was engaged in the business of.ultimately leasing it to their customers.so the way the Tax Court looked at it in.both of these particular cases the way.that they saw it was that you the.aircraft owner or the aircraft owner in.these cases was actually leasing the.aircraft to a flight school or FBL their.customer was the flight school or FBO.that was the leasing the aircraft for.let's say the average term of one year.and that meant that those exceptions we.just talked about the 7-day the you know.defined business hour just simply did.not apply and that created the problem.for both of those.taxpayers in those tax court cases and.and those are two published cases there.may be other cases out there that some.of you are aware of where you know it.might have gone the small tax court.route but I haven't heard of them and we.welcome feedback on that but right now.those are the two published cases that.we're looking at now you might say well.my gosh then what happens to the losses.that I've had at the end of the day.there is still some silver lining on.that cloud and the silver lining is and.and this is what pops up next here is.that in fact those stored up losses that.are out there can be used to go ahead.and offset any potential future gains.that might come when you go ahead and.sell the aircraft I think that might.have been a a slide back there but.that's you know we'll talk about that in.a little bit that that in fact these.losses may be used later on upon the.sale of the aircraft another hurdle.you've got to get to even if you could.get over the rental presumption is going.to be the material participation issue.yeah this is where it gets really.seemingly created if you're going to try.to get through it that's right and.what's gonna happen here is you're gonna.have to actually deal with a couple of.issues that again are problematic one.and there are some ways to establish.that you are materially participating.but you've got to show even if you can.get past the rental presumption that you.meet these material participation tests.the first way to do this and this isn't.easy and I actually have not seen anyone.do this yet I'm sure there's somebody.who can do it but you've got to be able.to show that you are participating in.this activity 500 hours or more a year.and you've got to be able to show.evidence that you did the other material.participation test is what we call the.100 hour test you've got to be able to.show that you've invested 100 hours or.more of time in this activity and there.are some very specific types of.I'm that have to be invested and we'll.talk about that a little bit later but.that nobody else including the folks at.the FBI or flight school or not putting.in more than the amount of time that.you're putting into this so that's.another hurdle and then finally again I.haven't seen it used facts and.circumstances test that's material.participation test three again there are.more material participation tests that.would potentially work but those are the.most common and those are the types that.might be the best bets if you're going.to be able to do this at all so you got.those tooth tests you've got to get test.one is the presumption that this is a.rental activity and those two cases are.difficult to get past and if you can.even get past that you then have to get.past the material participation test and.there we've even seen one case and.that's the next slide here I think it.was the the Williams case where the Tax.Court looked at this and in this.particular case the aircraft owner.failed to meet the material.participation test because of.documentation issues they did not.according to in the opinion of the Tax.Court properly document their hours in.the activity and as a matter of course.the hours that you're documenting have.to be real hands-on activities I'm over.generalizing and somewhat dangerous but.it can't be activities that a typical.investor or owner would be involved in.like looking at financial statements.looking at the kinds of reports that are.being generated by the flight school.that kind of time is typically not going.to count it's gonna have to be real.hands-on time which sometimes just.doesn't happen with these FBO and flight.school leaseback so that's something.that would have to be carefully analyzed.by you and your accountant before you.ever got into this because these tests.are not easy to meet.the published cases that were aware of.have not gone the way of the aircraft.owner there are some and I've seen them.I'll say very well-thought-out.agreements that are not called leases.but the drafters are you know very you.know highly qualified lawyers who try to.cast this as a marketing agreement so.that all that they're doing is marketing.your aircraft to third parties and those.third parties are really your customer.but I you know it's so easy to poke a.hole in that if you were to turn that.model on its head and ask the customer.who are they leasing from who are they.running from who are they paying to use.that aircraft they don't know the name.of the owner more typical or they home.at them if they're leasing it from the.flight school whose staff is providing.them with the keys and logbooks and.facilitating the transaction to some.degree that's why I've been a little bit.cautious about that and and that's why.I've tended to advise the folks I've.spoken to that in most cases and I mean.95 to 99 percent of the cases I've seen.these arrangements are going to generate.if there are losses they're going to be.passive losses and a lot of times don't.forget the losses are going to be.generated largely due to the.depreciation that's being taken on the.aircraft over the years so what happens.if they are passive losses as I started.to say a little bit earlier not all is.lost those passive losses can be.suspended or stored up and indefinitely.as long as you still got the airplane.and then they can be used later on when.you go to sell the airplane the health.offset any kind of loss presumably as I.say here on you know a depreciated.aircraft so let's go through a solid.example let's go back to that aircraft.that you paid $100,000 for and you've.had it on the line that's been.generating a nice steady cash flow for.you.but you have depreciated it and you have.had losses over the years and now the.aircraft and we'll oversimplify a bit.but now we're six or seven years out.it's been depreciated down to zero.you're ready to move out of this.business for various reasons and the.aircraft might be sold that many years.later with the wear and tear on it for.let's say seventy thousand dollars if.that aircraft has been depreciated down.to zero.you paid $100,000 for it but you're.gonna get seventy thousand on the sale.guess what you've now got a $70,000.ordinary gain we call that a gain from.the recapture of the depreciation so if.that happens and you've treated your.losses as passive losses you can now use.those losses to help offset that.recapture and when that comes and that.kicks in it could be handy so again not.all is lost its really a timing issue in.many cases but this is a question if you.haven't already figured that out that's.going to need to really be carefully.analyzed by you your tax counsel your.CPA before you ever get into this with.people call us over at pilot protection.services over at legal service plan.related to aircraft lease backs we'll.talk to them specifically about their.particular case and then sometimes we'll.even get into a discussion with their.lawyers and cpa's to see what might work.best for them so that's the passive.activity loss rules if you haven't had.enough for that there's one more to go.oh yes and this is the little hurdle yes.the Hobby loss rule a lot of folks have.heard of this this basically is an IRS.test or there's a series of tests that.they'll have you look through or that.they will look through if they're ever.looking at your case and you'd prefer.that they not but basically the rule.says look if if you don't have an.objective intent to make a profit on.this deal right if you're just doing.this to spin off tax losses we're gonna.be watching you.and if you are we may not allow your.deductions and we're going to disallow.them up to the point where you've been.generating revenue so in fact if the IRS.comes in and says look this is being run.as a hobby because all we ever see are.losses from this activity this is what.you're going to have to deal with there.is a presumption that could work in your.favor if you're able to show a profit.for 3 out of 5 consecutive years and.that's kind of a moving three to five.years as you go out and the IRS looks at.a lot of factors here I can't go through.them all with the time we've got tonight.but generally you've got to be able to.establish that you went into this with a.plan with a well thought-out plan with a.plan that maybe you had your CPA or.other advisors involved in where it's.clear that you had a reasonable and.realistic intent and objective intent to.make a profit on this arrangement and.they'll look at several things in order.to test that assertion and you've got to.be ready for this and they are mostly.looking at tax returns there's no.general rule but they're mostly looking.at tax returns where there would be high.net income from other sources and then.big losses on write-offs from the.aircraft building your own tax shelter.exactly right that's what this section.was designed to prevent so you want to.be careful about this one as well.however if you were a shall we say.either a bad or unlucky businessman.person that there's a difference between.that and trying to exploit this there.there is that there is that distinction.and I've seen cases where there might.have been a terrible year for whether.there might have been an accident that.an aircraft was involved in and the.taxpayer was able to push back mm-hmm on.the assertion that it was a hobby.because of unforeseen circumstances seem.staying stands the reason perhaps if the.aircraft is damaged substantially and is.down for six months or a year right you.know.but this was really designed to capture.those who might not have had that.objective and Tetra and they have a way.of looking at the returns and sorting.out returns that might be fruitful for.them let's put it that way when they.start looking at it oh how colorful yes.right so you want to you want to be.mindful of that and I'm sure if you're.getting it to this and talking to your.CPA they're gonna be very mindful of it.as well.leaving the income tax issues there may.also be sales and use tax issues this.won't apply everywhere but I thought.it's worth mentioning that in many.states several states there may be an.exemption when folks are purchasing an.aircraft for resale now you might say.well look I'm not purchasing it.purchasing the aircraft for resale I'm.purchasing the plane so that it can be.leased out to others and you're right.but a resale is often defined by state.law as a lease so resale equals lease in.this context so what this might do for.you and again you need to check on this.locally with local tax Council is it.might allow you to avoid the initial.payout of sales or use tax on your.aircraft purchase and then pay it out.over time and that's really the second.point on the slide if you're getting a.check from the FBO or flight school for.your lease on the aircraft you might.then need to pay overtime each time you.get one of those checks so let's say you.get a check for a thousand bucks in a.particular month the sales tax rate in.your state is 5% you might have to write.a check for $50 and that would go on and.on each month that the aircraft is on.lease better but at the end of the day.it might be helpful to not have to pay.it right up front sometimes even on.individual flights the flight school may.have to collect and remit sales tax on.individual flights I know in some states.there are exemptions that are available.if in fact the aircraft is being used.for flight instruction or for flight.training purposes because the state will.look at that and say well that's really.a service that's being provided it's not.just the rental of an aircraft but if.you're just renting the aircraft if the.flight school is just renting an.aircraft to a pilot is using it to get.from point A to point B there there.might be as sales or a sales tax that.needs to be applied there and that.distinction but I think it's New York.City now who charges tax or doesn't.based on if you buy a cold bagel at a.coffee shop versus if they cut it and or.put cream cheese on it as prepared food.prepared food or food off-the-shelf have.different taxation structures and it's.just like you said here in Maryland may.still be the case when when I was.involved in the Pheo operations we did.charge tax on on the rentals but we did.not charge for instructional and that is.to my knowledge still the rule here in.Maryland is that if it's being used for.flight instructions or flight.instruction purposes that it is exempt.because really what's being provided as.a service so probably the best takeaway.from this is that a lot of this is very.local in nature you do need that kind of.local tax counsel to see if in fact any.of these exemptions or rules will apply.to you if indeed you're getting involved.in a leaseback operation all right so.now just some reflections yes on this.and then maybe some time for questions.we'll see but first you've got to be.treating this as a business again you.don't want to go into this just as a way.to help you pay debt service on the.aircraft you want to really go into it.with the thought in mind you're gonna.make some money off this if nothing else.you're gonna have a positive cash flow.in order to do that you're gonna need to.find the right FBO or flight school you.need to find one that's busy that treats.its owners well and how do you find that.out well.you got to start talking to people.you've got to do your research you want.to see what kind of usage other people.are getting how well the maintenance.providers are dealing with with owners.there's a lot of things that you're.going to have to think about here and.you're gonna have to ask questions.because again this is a business and.you're going into it to make money and.you want your aircraft to be treated.properly you want to be sure that your.use of the aircraft is not going to.interfere with the ability of this deal.to make money that is important I hate.to say it but again it goes back to.treating this as a business your use of.it might have to be secondary and in.fact you're gonna have to factor that in.as you consider whether or not this is.the right kind of deal for you if you.want less users and more time to it.there may be a better way to do it.but the time to think about that is.upfront something else to think about is.you know have this plan run the numbers.before you go out and buy the aircraft.that sounds obvious but I see so many.people who don't do it and don't just.run the numbers on your own have an.objective third-party look at this.somebody who maybe does your tax return.somebody who's closed and knows the rest.of your tax circumstance so don't do.this in isolation from everything else.you do in your business world this is.going to be a part of your tax return a.part of your you know a cash flow so.make sure that it's in fact gonna work.when tied in with everything else that.you do and that's not just looking for.professional advice on your own personal.back-end that's also may be looking to.the FBO for their experiential advice on.the front end namely you can taxes in.that Oh in the winter it'll be slow but.it'll probably fly 50 hours a month you.need to plan for those unexpected.weather turns those those long.maintenance downs you know there's going.to be some wide variability in.what you might see on a month-to-month.basis year-over-year and the FBO like.that experience you've got history.should they be willing to do so might.even be able to show you some data and.if it's the kind of FBO you want to work.with they should show you that sort of.data right and if you can get your if.you have the ability to go out and talk.to other owners that's another place to.get some of that data and finally you.know you want to get an aircraft cuz.this is a place where I've seen people.fail before is you want to get an.airplane that's gonna be the right kind.of fit for this leaseback I mean for you.mean for me the owner right no right.this is gonna be the right fit for the.lease back I want a twin good luck right.uh you you want to find one that's gonna.be flown you want to find one that's.gonna get good news you want to find one.that's gonna make you money that's what.this is all about you want it you're in.the business of leasing an aircraft to.make money you want one that's going to.be used and I'd love to give an example.it might not just be making model but it.might be more than that.you know pa-28 Cessna 172s they're out.there everyone's flown them everyone's.flying them they're popular because.they're ubiquitous regardless of if you.prefer piper SS know we all have our.high wing or low wing opinion like Coke.or Pepsi but example at the flight.school where I was most recently we had.a number of post production gap 172 so.we had three flavors we had our model.172s mm-hmm we had s models with.basically the same panel with twenty.more horsepower a little better climb.rate in the summer better cruise and all.I have to do is a paperwork check out to.move up from the art of the s so those s.models were popular not to mention the S.model G when thousands as well we did.have some students who started on day.one and just the g1000 model the sky.Hawk and that's all they ever wanted to.fly personal preference that's fine so.if we used to if at one point we had.four of those glass sky Hawks and now we.have two there's a great vacuum to fill.no you've got to talk to people right.what's that out exact but it can't be.it's it's got to be about the leaseback.not about your personal press right and.but of course the exam.I'm giving we've already gotten over the.hump of for all practical purposes the.making model those are right further.details that you can use to even further.refine the lot of choice cash good.success but yeah but as like jokingly.said you know the idea of I want a twin.but there's no need for a twin at my.local FB / airport you know you just.have to bite the bullet and at least.target and making model that has a.likelihood of not spending its life on.the ground you bet that is important and.often a hard a difficult hurdle for some.owners to get tasks all right at the.start right not sure if we've got some.questions that came in well one of the.biggest questions we've seen is people.want to know you know early on we talked.about not just you but this idea that.CPAs and/or attorneys are entities that.are going to be able to help me as a.potential leaseback and then engage.leaseback owner do this the right way.be effective stay legal what's the best.way to locate one of these these rare.species of people and how can a OPA help.well the way that I see this typically.is through the legal service plan so if.a member should come through the door.and tell us that we've in fact got least.a part of the legal service plan will.involve us in our office and usually me.reviewing the lease and having a.preliminary discussion with the member.and then what we can do if they're in.the process of buying an aircraft which.is often when they're thinking about the.lease back we can then through the buy.sell coverage in the plan go ahead and.get the member referred out to local.counsel these local counsel are usually.pilots aircraft owners who are part of.our legal service plan panel so they can.be very helpful and again we will if.you've got a lease that you'd like us to.look at we will look at it get back to.you with written and verbal comments if.you want to talk about it on the phone.great all right so the the real emphasis.here regarding Q&A is we.about out of time is that so many.frankly every sort of question that we.get in this domain is so specific it.that the best way to really have any.sort of effective conversation is to.reach out and contact us phone call.email either our pilot Information.Center where I work and there's our.contact info or if you're a pilot.protection services participant you can.reach out to them.so let's look we've got the contact info.there and ray thanks so much for being.here to help educate our members on the.ins and outs of aircraft leasing Thank.You Bertie and thank everybody out there.all right and to our viewers thanks for.joining us tonight as well and with.those questions you might have as part.of your membership you can contact our.pilot Information Center staff Monday.through Friday at 800 USAA OPA that's.800 eight seven two two six seven two.you can also email your questions to us.at pilot assist at a OPA dot org also.while you're here please do subscribe to.our youtube channel here with the red.subscribe button just below the video.and don't forget to check out more.details on our pilot protection services.website here at AOPA as ray mentioned.@ww AOPA org slash PBS or you can go on.Google or your favorite search engine.and you can search for AOPA pilot.protection services thanks so much we'll.see you next time.you.you.

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Just register on the admission portal and during registration you will get an option for the entrance based course. Just register there. There is no separate form for DU CIC.

What happens to all of the paper forms you fill out for immigration and customs?

Years ago I worked at document management company. There is cool software that can automate aspects of hand-written forms. We had an airport as a customer - they scanned plenty and (as I said before) this was several years ago... On your airport customs forms, the "boxes" that you 'need' to write on - are basically invisible to the scanner - but are used because then us humans will tend to write neater and clearer which make sit easier to recognize with a computer. Any characters with less than X% accuracy based on a recognition engine are flagged and shown as an image zoomed into the particular character so a human operator can then say "that is an "A". This way, you can rapidly go through most forms and output it to say - an SQL database, complete with link to original image of the form you filled in. If you see "black boxes" at three corners of the document - it is likely set up for scanning (they help to identify and orient the page digitally). If there is a unique barcode on the document somewhere I would theorize there is an even higher likelihood of it being scanned - the document is of enough value to be printed individually which costs more, which means it is likely going to be used on the capture side. (I've noticed in the past in Bahamas and some other Caribbean islands they use these sorts of capture mechanisms, but they have far fewer people entering than the US does everyday) The real answer is: it depends. Depending on each country and its policies and procedures. Generally I would be surprised if they scanned and held onto the paper. In the US, they proably file those for a set period of time then destroy them, perhaps mining them for some data about travellers. In the end, I suspect the "paper-to-data capture" likelihood of customs forms ranges somewhere on a spectrum like this: Third world Customs Guy has paper to show he did his job, paper gets thrown out at end of shift. ------> We keep all the papers! everything is scanned as you pass by customs and unique barcodes identify which flight/gate/area the form was handed out at, so we co-ordinate with cameras in the airport and have captured your image. We also know exactly how much vodka you brought into the country. :)

What tax forms do you fill out to bill as a consultancy?

You will report your gross earnings and itemized expenses on schedule C of your federal form 1040. Your net earnings will be subject to not only income tax depending on your bracket but also self employment tax.

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