Over the last several years- owners of corporate aircraft have been confronted with cumbersome new rules governing tax deductions and reporting requirements for corporate aircraft- reports Keith Swirsky.
New Taxes Levied by the IRS on Corporate Aircraft Operations Over the last several years- owners of corporate aircraft have been confronted with cumbersome new rules governing tax deductions and reporting requirements for corporate aircraft- reports Keith Swirsky.
These new rules relate primarily to personal use of corporate aircraft- eligibility for the Modified Accelerated Cost Recovery System (MACRS) method of depreciation- and characterization of tax losses as passive. Additionally- in recent years the IRS has expanded the scope of its audits of aircraft owners and charter operators to place a greater emphasis on federal transportation excise taxes.
In particular- in recent IRS audits- the federal government has begun asserting that in the circumstances described in this and next month’s article- an aircraft owner’s use of its aircraft under Part 91 of the Federal Aviation Regulations (FAR) will be subject to the same 7.5% federal transportation excise tax that is normally applicable only to commercial aircraft operations.
In the IRS handbook published for use by field auditors- the IRS provides guidance concerning the issues of “possession- command and control.” Generally- the handbook provides that- when an aircraft is managed by an external management company- there are circumstances whereby the aircraft owner may be deemed to have transferred possession- command and control of the aircraft to the management company.
If this happens- the management company is deemed to be providing “transportation services” to the aircraft owner- resulting in the application of the 7.5% federal transportation excise tax- regardless of whether the aircraft is operated by the owner under Part 91- or by the management company under FAR Part 135.
If the IRS determines that the management company is providing “transportation services” to the aircraft owner- it will typically assess the 7.5% federal excise tax on all amounts paid by the aircraft owner to the management company- including such things as reimbursements for crew salaries- insurance premium payments- hangar rent- management fees- and all aircraft operating costs advanced by the management company on behalf of the aircraft owner.
While the typical fact pattern involves use of the owner’s aircraft for charter to the public- application of the guidance provided by the IRS to its auditors is not limited to fact patterns involving charter.
In other words- while it is more likely that an IRS auditor will conclude that possession- command and control have shifted to the management company when the aircraft owner’s aircraft is also being utilized in FAR Part 135 charter operations by the management company- an IRS auditor may conclude that possession- command and control have shifted to the management company when the owner’s aircraft has not been used in the conduct of FAR Part 135 charter operations.
Per the IRS handbook- auditors are instructed to analyze certain factors to determine whether possession- command and control of the owner’s aircraft has shifted- including which party (i.e.- the aircraft owner or the management company) employs the crew- which party obtains the insurance- and which party is responsible for conducting maintenance on the aircraft. In a common scenario- it is typical for the management company to provide all of these services on behalf of the aircraft owner.
Additional factors include whether the aircraft owner has a right to pre-approve the scheduling of the aircraft for third-party charter usage- and whether the aircraft owner has the right to cancel any previously scheduled charter flight if- after approving a charter- the aircraft owner later determines that it will need the aircraft for its own purposes at a time that conflicts with the previously scheduled charter.
If the contract between the aircraft owner and the management company provides that the owner’s right to unfettered use of its aircraft may be restricted because of a previously scheduled charter- the IRS may use those contractual provisions to conclude that the owner has given up possession- command and control of the aircraft.
The IRS’s audit position is alarming and simply wrong. As a practical matter a management company merely serves as an outsourced version of an in-house flight department by providing all of the services necessary to manage the aircraft for the aircraft owner’s operations.
Having offered a basic outline- next month we will continue with this topic by offering a more specific review of the situation. Although thoughtful planning can be of only limited benefit until the IRS audit guidelines are revised- it is hoped this outline will offer some caution to prevent you from falling foul of the IRS while the issue awaits resolution.
Do you have any questions or opinions on the above topic? Get it answered/published in World Aircraft Sales Magazine. Email feedback to Jack@avbuyer.com