Personal Use of Corporate Aircraft Before and After the American Jobs Creation Act of 2004

Business owners are using corporate jets more because commercial air travel is inconvenient. But owning and operating a jet involves complicated laws about taxes, aviation, and liability. One important tax law, Code §274, affects how much of the jet’s expenses can be deducted. The law says that the expenses must be “ordinary, necessary, and reasonable” for the business. The depreciation rules are also important because they affect how much the jet is worth over time. Another tricky rule is about using the jet for entertainment, which can affect how much can be deducted. The tax law says you can’t deduct expenses for entertainment facilities, like a hunting lodge or swimming pool. But there are some exceptions, like if the expenses are treated as compensation for an employee. There was a case about this involving an airplane company that’s been talked about a lot. Before Sutherland Lumber, there was uncertainty about how much personal use of a company-owned airplane would cancel out its business use for tax purposes. The law became more lenient and clear in 2000 with the Sutherland Lumber case, which focused on an exception to the entertainment facility rules for goods, services, and facilities that are treated as compensation to the employee. The case challenged deductions for the use of a company-owned aircraft by its employees for nonbusiness flights. The IRS argued that the deduction should be limited to the amount included in the employees’ compensation. This was significant because the corporation valued the personal use at a lower safe harbor valuation for tax purposes, resulting in a lower allowable deduction according to the IRS’s position. Ultimately, the court’s decision in Sutherland Lumber provided more flexibility for businesses using company aircraft for both business and personal purposes. The Tax Court said that if an executive’s pay includes the value of using a company plane for personal trips, the company can deduct the full cost of those trips. It doesn’t matter if the value of the trips is lower than the deduction. In 2002, the IRS agreed with a court decision that said if a company includes the value of an employee’s vacation flight as income, then the company can fully deduct the personal use of corporate aircraft. In 2003, the IRS also said that a company can deduct expenses for personal use of an aircraft, even if most of the use is for employees’ personal use, as long as the value of the flights is included in the employees’ income. This made taxpayers feel safe from IRS scrutiny. But in 2004, a new law changed this, and now companies can’t fully deduct personal use of corporate aircraft. The law was changed to limit companies from deducting the costs of using an aircraft for entertainment for certain important people in the company. This change closed a loophole that allowed companies to deduct these costs. The IRS will provide more guidance on this, but for now, companies should keep good records and operate as they did before this change. There are other tax issues to consider when it comes to owning and using a corporate aircraft, so it’s important to get advice from a tax professional. In short, if you are thinking about getting a company plane, you need to know about a law from 2004 that changed the tax rules. If you already have a plane, you might need to change how you let your top people use it to follow the law. The National Business Aviation Association has more than 15,000 business aircraft in the U.S., with 10,000 companies owning them. Airlines are experiencing a decrease in on-time arrivals and an increase in flight cancellations. The IRS has specific rules for how companies can deduct expenses for using corporate aircraft, and the American Jobs Creation Act of 2004 changed some of these rules. The new law limits the amount of expenses that can be treated as compensation for employees using corporate aircraft for personal trips. It’s important for companies to keep detailed records of all flights for tax purposes.

Source: https://www.floridabar.org/the-florida-bar-journal/personal-use-of-corporate-aircraft-before-and-after-the-american-jobs-creation-act-of-2004/