Depreciating Business Aircraft: Avoiding the Entertainment Disallowance and §280F

Business aircraft are often seen as a luxury rather than a useful tool. The IRS closely monitors aircraft purchases and use. However, when used properly, a business aircraft can be a valuable asset for a business. The biggest fixed cost for a business aircraft is depreciation. To qualify for depreciation, an aircraft must be used for business or income production, not personal use. Any personal use of the aircraft by the owner or guests may result in disallowance of deductions for personal flights. Employees who own their own airplanes may use them for work-related travel, but they can only deduct the expenses for business trips, not personal ones. Employers who own airplanes and provide flights to their employees are generally considered to be providing a legitimate business benefit. The IRS focuses on whether the flights are subject to entertainment disallowance or substantiation requirements. If an aircraft is used for commercial purposes, it’s subject to a 12-year class life and a seven-year recovery period for depreciation. If it’s used for noncommercial purposes, it’s subject to a six-year class life and a five-year recovery period. If an aircraft is used for both commercial and noncommercial purposes, its primary use will determine its useful life. For example, if a business owner registers their aircraft as noncommercial but occasionally charters it to cover costs, the primary use will determine the depreciation period. It’s important to keep track of how often the plane is used for charter flights to avoid paying extra taxes. Charter agreements are usually flexible, so if the plane is available, the charter operator will use it as much as they can. If a depreciable asset like an aircraft is used for business purposes, it can be depreciated over a certain number of years. The way it is depreciated can change if the way the aircraft is used changes. If an aircraft is used more for business, it can be depreciated more slowly, and if it is used less for business, it can be depreciated more quickly.

Aircraft are subject to special rules for depreciation, and if they are not used mostly for business, the way they are depreciated is limited. This means it takes longer to write off the cost of the aircraft.

To figure out if an aircraft is used mostly for business, there are two tests. First, at least 25 percent of the time the aircraft is used, it has to be for business. Then, when you add in certain other uses, at least half of the time the aircraft is used, it has to be for business.

Meeting the business use tests can be tricky for aircraft, especially if they have complex ownership arrangements and other considerations besides just taxes. Multiple businesses often share the use of an aircraft to save costs. To avoid extra regulations, they use a dry lease to transfer control among the businesses. The IRS may not count these leased flights as qualifying for a tax benefit, but they are reviewing the issue. Businesses should monitor their aircraft use to avoid affecting the aircraft’s depreciation. The American Jobs Creation Act of 2004 limited the ability to deduct expenses for using a private aircraft for entertainment purposes. After many years of uncertainty, the IRS finally released regulations in 2012 to explain how to calculate the disallowance of entertainment expenses. There are two methods to calculate the disallowance, and taxpayers can choose the one that gives them the lowest disallowance amount, but they have to use the same method for all their flights in a year. The regulations don’t give a clear definition of entertainment use, but they do provide detailed rules for how to calculate the disallowance percentage. The method you choose can affect how much of your expenses can be deducted, especially when there are factors like how long the flights are and how many people are on board. It gets even more complicated when you have flights with no passengers, maintenance flights, and trips with multiple stops. The new rules for deducting aircraft expenses can have a big impact on how much it costs to own a plane. Even small changes to your flight plans can affect how much you can deduct. So, it’s important to carefully consider all the rules when buying a plane. A construction company bought a plane for $10 million and used it for business purposes for the first 6 months, so they were able to deduct $6 million in 2016. But then the owners used the plane for a trip to a conference in California, and because they brought their families too, they could only deduct $105,000 instead. This shows how important it is to plan carefully when using a plane for business, or else you could lose a lot of money in deductions. The Tax Court has ruled that depreciation for tax purposes is not subject to the same rules as regular business expenses. There are specific regulations for how depreciation is calculated, including a method called the standard industry fare level (SIFL) formula for valuing personal use of private aircraft by employees. It’s important to follow these rules to avoid having to include excess depreciation in your income in future years. The PATH Act of 2015 extended bonus depreciation for new aircraft. The regulations on personal use of corporate aircraft were updated, including rules on entertainment, flight miles, and flight hours. The article was written by a tax attorney from a law firm in Tampa, and is submitted on behalf of the Tax Law Section of The Florida Bar.

Source: https://www.floridabar.org/the-florida-bar-journal/depreciating-business-aircraft-avoiding-the-entertainment-disallowance-and-280f/