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Board of Directors Briefing:
Tax Consequences of personal use of the corporate aircraft.
Addressing specific issues Boards need to consider in analyzing corporate aircraft acquisition and use policies- Keith Swirsky and Troy Rolf begin this series with a look at Federal Income Tax consequences of personal use of corporate aircraft by executives and employees.

Generally speaking- operating costs of business aircraft used for executive and employee travel in an active trade or business are deductible for federal income tax purposes- provided the expenses are ordinary- necessary and reasonable. This requires that the expense be “appropriate” and “helpful” in carrying on the taxpayer’s business; that it be a common and accepted practice; and that it be reasonable in amount.

The courts have recognized that it is common and accepted practice in some situations for executives and other employees to use a corporate aircraft for transportation for business travel. Questions often arise- however- concerning the deductibility of aircraft operating expenses with respect to use of an aircraft by executives and other employees for personal- non-business travel.

Travel for personal- non-business purposes is generally not a deductible business expense. However- costs incurred by a company to compensate an employee for services rendered are generally deductible- subject to the overriding requirement that the expenses be ordinary- necessary and reasonable.

Therefore- when a company compensates an employee for services by providing the employee with access to the company aircraft for personal- non-business transportation- the expenses incurred by the company to provide the transportation could be considered deductible compensation expenses- provided that the total cash and non-cash compensation is reasonable.

Where a company allows an executive or other employee to travel on a company aircraft for personal- non-business purposes- IRS regulations require that the executive/employee either pay fair value for the transportation- or recognize as fringe benefit income an amount equal to the value of the transportation. Subject to a few- limited exceptions- however- FAA regulations generally prohibit companies from accepting compensation from executives or other employees for travel on a company aircraft for personal- non-business purposes.

Consequently- many companies are left with no option but to impute the value of an executive’s/employee’s personal flights to the employee as fringe benefit income.

DETERMINING THE AMOUNT REQUIRED
IRS Regulations provide two methods for determining the amount required to be included in an employee’s income- including:

• The fair charter value method- which requires that income be imputed in an amount equal to the amount that would be charged to charter a similar flight from a third-party commercial charter operator; or

• The SIFL method- which relies on a rigid mathematical formula that takes into account a variety of factors related to a flight- including the distance flown- the weight class of the aircraft used- the status of the executive/employee as a “Control Employee” or a Non-Control Employee- and the number of family members and guests who accompany the executive/ employee on the flight.

The SIFL method is by far the most common method for imputing income- in part because the mathematical formula avoids the necessity of trying to determine the amount that would be charged to charter a similar flight from a third-party commercial charter operator- and in part because the SIFL formula usually- if not always- results in a lesser amount of income being imputed to the employee than would typically be the case under the fair charter value method.

When income is imputed to an employee for a personal flight- the Internal Revenue Code nevertheless limits the ability of the employer to deduct the expenses and depreciation attributable to the flight when (i) the flight was for Entertainment- Amusement or Recreation purposes- and (ii) the executive/employee is a “Specified Individual”.

CLARIFICATION OF TERMS
The terms “Entertainment”- “Amusement” and “Recreation” mean any activity of a type generally considered to constitute entertainment- amusement- or recreation- such as entertaining at country clubs- golf and athletic clubs- sporting events- and on hunting- fishing- vacation and similar trips.

The term “Specified Individuals” means any person who is the direct or indirect owner of more than 10% of any class of equity security of the taxpayer- and any officer or director of the taxpayer. In such cases- the company’s expense and depreciation deductions attributable to the flight cannot exceed the amount that is imputed to the employee as income for the flight.

The IRS has prescribed primary and alternate methods for allocating expenses and depreciation to various categories of flight operations- such as business and entertainment/amusement/recreation. Due to space limitations- the details of those methods are beyond the scope of this article.

This article provides only an introduction to the topic of federal income tax consequences of personal use of corporate aircraft by executives and employees. The tax rules governing personal use are very complex- and boards of directors should consult experienced aviation tax counsel before establishing any corporate policy concerning personal use of corporate aircraft by executives and/or other employees.

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