In 2026, the line between a private flight and an illegal charter has never been thinner. With 100% bonus depreciation restored and FAA ramp check activity elevated, how you structure your lease determines more than your tax refund, it determines the safety of your pilot certificate.
The distinction between wet and dry leasing is defined by a single factor: whether the lessor provides crew. Everything else, the tax treatment, the FAA regulatory obligations, the insurance structure, and the liability exposure, flows from that one determination.
"Any leasing arrangement whereby a person agrees to provide an entire aircraft and at least one crewmember." The lessor retains operational control. If you have ever chartered an aircraft on demand, you entered a wet lease agreement.
Two major exceptions permit Part 91 operations under wet lease conditions: time-sharing agreements and interchange agreements under FAR §91.501.
Aircraft + Crew provided"The lease of an aircraft without any crewmembers." The lessee assumes operational control and independently sources crew. Analogous to renting a car, the rental company provides the vehicle, not the driver.
For aircraft held in a standalone LLC, a properly structured dry lease to an operating company creates the separation that makes bonus depreciation deductible against active income.
Aircraft only, lessee provides crewYou cannot contract away operational control through lease language alone. The FAA examines the "totality of circumstances", meaning how the arrangement actually operates in practice, not what the contract says. A lease document that calls itself a dry lease while the lessor selects pilots is a wet lease in the FAA's view, regardless of the paperwork.
| Factor | Wet Lease | Dry Lease |
|---|---|---|
| Crew provided by | Lessor | Lessee (independently sourced) |
| Operational control held by | Lessor | Lessee |
| Regulatory classification | Typically Part 135 or 121 | Part 91 (if properly structured) |
| Federal Excise Tax (7.5%) | Generally applies | Does not apply if properly structured |
| Truth-in-leasing (§91.23) | Applies to large aircraft | Applies to large aircraft |
| Bonus depreciation eligibility | Complex, consult CPA | Potentially yes with LLC + grouping election |
| Insurance complexity | Lower (one operator) | Higher (multiple named insureds required) |
| Common use case | On-demand charter, time-share | LLC ownership, fleet sharing, cost offset |
Operational control means "the exercise of authority over initiating, conducting, or terminating a flight" (FAR §1.1). The party with operational control bears ultimate responsibility for flight safety and regulatory compliance. The FAA breaks operational control into three components: ensuring crewmembers are trained, qualified, and rested; ensuring the aircraft is airworthy and compliant; and determining weather minimums, fuel requirements, loading, and operational conditions.
The FAA does not take your lease document at face value. It uses a multi-factor examination to determine which party actually holds operational control, and if the answers point to the lessor, the arrangement is a wet lease regardless of what the contract says.
If you answer "the lessor" to most of the questions above, you likely have a wet lease regardless of what your contract says. The FAA's enforcement teams are trained to spot this pattern.
An exclusive dry lease transfers custody and control of an aircraft to a single lessee for the entire lease term. These arrangements rarely face FAA scrutiny because the lessee clearly operates, maintains, insures, and controls the aircraft. Common examples include aircraft financing leases, owner trust operating agreements, and long-term corporate fleet leases.
Non-exclusive dry leases allow multiple parties to use the same aircraft at different times, with operational control transferring between parties. These arrangements require significantly more documentation and attract far more regulatory attention.
The single most important factor in classifying a lease as wet or dry is who provides the flight crew. If the lessor provides, requires, or effectively controls crew selection, the arrangement is a wet lease, regardless of what the contract calls it.
Did the lessee "knowledgably and intentionally" select the crew of its own volition, understanding it has assumed responsibility for that selection? The FAA requires affirmative evidence that the lessee made an independent crew decision, not that they simply chose from a list provided by the lessor.
If the lessor provides a list of "approved" pilots and it is implied the lessee must choose from that list, the FAA will likely classify the arrangement as a wet lease. There is no absolute prohibition on lessors and lessees using the same pilots, but the lessee must demonstrate it selected crew independently, without lessor direction or control.
FAR §91.23 truth-in-leasing requirements apply to leases of large aircraft, those over 12,500 lbs. MTOW, unless the lessor or lessee is a foreign air carrier or certificate holder under FAR Parts 121, 125, 135, or 141.
The FAA and IRS evaluate leasing arrangements using different tests, and a lease that is properly structured for FAA purposes may still trigger Federal Excise Tax liability under IRS rules. Understanding both is essential before executing any lease structure.
The FAA uses "operational control" to determine regulatory responsibility, meaning who bears liability for the safe conduct of the flight.
A properly structured dry lease transfers operational control to the lessee, keeping the operation within Part 91 private aviation rules.
The IRS uses "possession, command, and control" to determine Federal Excise Tax (FET) liability, a completely separate test that can produce a different result than the FAA determination.
If the IRS finds the lessor retained possession, command, and control, the 7.5% FET plus segment fees apply even if the FAA classifies the arrangement as a dry lease.
While the federal OBBBA restored 100% bonus depreciation, California (under SB 711), New York, and several other states have officially decoupled for 2026, requiring you to add back the federal deduction and use traditional depreciation schedules. Washington State added a 10% Luxury Aircraft Tax on non-commercial aircraft valued over $500,000. If your dry lease structure does not account for the state where the aircraft is habitually situated, a surprise tax liability is possible despite federal compliance. Consult your aviation CPA before finalizing the structure.
The 100% bonus depreciation deduction is available against active income only, not passive income. For a CEO or business owner flying 150 hours per year, the aircraft LLC structure with a proper grouping election under Treasury Regulation 1.469-4 is the mechanism that converts a passive deduction into an active one. The dry lease between the LLC and the operating company is the structural requirement that makes the election work. See the full bonus depreciation guide and the Piston to Turbine Transition Guide for the complete structure.
When multiple parties may operate an aircraft under a non-exclusive dry lease, insurance coverage must recognize all operators. A policy that names only the lessor as the operator creates a gap that leaves lessees exposed and may itself be evidence against a valid dry lease structure.
If the policy states that only the lessor or its management company operates the aircraft, the lessee appears to be a mere passenger, and that is evidence against effective operational control transfer. The insurer must acknowledge each lessee's operational control during their respective lease periods.
The FAA actively targets arrangements that disguise commercial operations as private aviation, particularly web-based dry lease programs that package aircraft with crew through related entities. The FAA has a specific term for these: "sham" or "devious" dry leases.
Enforcement consequences for violations include:
A related pitfall: the Flight Department Company Rule. An entity whose sole function is operating an aircraft for its affiliates is considered a "flight department company" by the FAA and must obtain commercial certification and cannot operate under Part 91. If your LLC does nothing but own and operate an aircraft for your operating company without a legitimate lease structure, you may trigger this classification.
The dry lease structure and the aircraft financing structure must align. A lender underwriting a business aircraft acquisition needs to understand the entity holding the aircraft, the lease arrangement if any, and the ownership structure. FLYING Finance has experience presenting complex LLC and leasing structures to lenders, the financing application is where these elements come together. See how business aircraft financing works →
Before executing any dry lease arrangement, confirm all of the following with your aviation attorney and CPA. This checklist applies to both exclusive and non-exclusive structures.
The lease structure and the financing structure must align. A lender underwriting a business aircraft acquisition will ask about the entity holding the aircraft, the lease arrangement, and the ownership structure. FLYING Finance has presented complex LLC and dry lease structures to lenders on behalf of hundreds of clients. We know what documentation lenders need and how to present it.
If you are acquiring an aircraft for business use, the structure conversation happens before the financing application, not after.