Personal Use of Corporate Owned Aircraft
Prior to the JOBS Act of 2004, this topic was just another administrative burden that corporate aviation dealt with quietly. However when the JOBS Act was implemented in October 2004, this became a Hot Topic. So hot that the NBAA is presenting a one day seminar entitled Complying with Regulations Regarding the Personal Use of Corporate Owned Aircraft in Los Angeles on May 29th of 2009 and our firm will be represented at this conference. Stay tuned for more details of that event.
In plain language, the personal use issue really has two basic components. The following two paragraphs will provide an overview and introduction to the more detailed information found elsewhere on our site.
The first component is the opportunity for companies to account for the non-business use of the aircraft by its employees as a fringe benefit. Since an aircraft is listed property under the depreciation rules, the operating costs and depreciation related to such non business or personal use of the aircraft would not be deductible except for the safe harbor presented in the SILF rules contained in IRC § XX. By utilizing the so-called SIFL rules (Standard Industry Fair Levels), a company can convert what would otherwise be non-deductible expense into a deductible fringe benefit for the employee who used the aircraft. These rules, when properly implemented, are designed to provide for a wage inclusion of an amount which approximates the cost of first class commercial airfare for the non-business flights flown for each employee. The rules provide for a higher rate for senior executives (control employees) and a lower rate for the rank and file (non control employees). The SIFL rules apply to all non-business or personal flights flown on behalf of the company employees regardless of the nature of the personal activity conducted by the employees benefitted by such flights. A proper application of the SIFL rules will generally result in a wage inclusion amount in the employee’s Form W-2 or the separate issuance by the company of a Form 1099-Misc with the reported amounts being subject to self employment tax. See a more thorough discussion at SIFL Rules.
The second component of the personal use issue is that under the JOBS Act, the fully allocated costs of non-business flights conducted for entertainment-related purposes are not deductible for federal income tax purposes. In this legislation, the IRS persuaded Congress to close loop holes which had developed under case law allowing companies to deduct the operating costs and depreciation of what were clearly entertainment related activities so long as the company had precisely followed the aforementioned SIFL rules. The legislation (which is _____ pages in length at font size 8) only contains a few paragraphs on this subject, so in October 2005 the IRS issued interim guidance in the form of Notice 2005-45 which provided specific examples on what expenses should be included in the concept of fully-allocated costs and proscribed an occupied seat hour/mile methodology for calculating the extent to which the fully-allocated costs of such entertainment flights would be disallowed (or not deductible). The rules as promulgated by Notice 2005-45 created a huge push-back response from many commenter’s and were dubbed “draconian” by some industry observers. Nonetheless taxpayers were forced to attempt to comply with these rules in their 2004, 2005 and 2006 income tax returns. During the fall of 2005 and throughout 2006, the NBAA and other industry groups aggressively lobbied congress to soften the rules as promulgated in Notice 2005-45. In June 2007 the IRS issued further guidance in the form of Temporary Regulation 1.274xx and which constitutes the current authoritative guidance on this subject. Under this temporary regulation, the IRS upheld most of the concepts introduced in Notice 2005-45 but did in fact ameliorate or soften certain aspects of the existing rules. Primary among these changes is the opportunity to calculate the cost disallowance utilizing a trip-by-trip method as opposed to the occupied seat hour/mile method and the opportunity to substitute a pseudo straight-line depreciation charge for the MACRS 200% DDB deprecation charge in the pool of fully allocated costs which is subject to disallowance. The calculated disallowed amount related to entertainment activities is used to reduce the otherwise deductible expense reported in the taxpayer’s tax return. Lastly and to distinguish these rules from the SIFL rules (which apply to all personal use flights), these cost disallowance rules only apply to non-business (personal) flights that are entertainment-related. To illustrate the point, a flight by the CEO of a company on the company-owned aircraft to visit his ailing mother would clearly be a non-business flight but under no definition of the term would this activity be deemed entertainment. Our website contains a significant volume of detailed information on this evolving subject (see Cost Disallowance) so check back often for updates and current developments.