United States

Private owned and operated aircraft expenses after tax reform

Employers must change how they categorize flights for the new rules

TAX ALERT  | 

The deductions permitted to operators of privately owned and operated aircrafts previously has been an area providing significant tax savings opportunities; however, after tax reform, the tax savings opportunities have been significantly reduced.

Under prior law, the Internal Revenue Code provided that employers would be allowed deductions for operating privately owned aircraft attributable to business flights, with a generous deduction for personal non-entertainment flights, and a general disallowance of costs attributable to personal entertainment flights.

However, H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA) provided the most substantial overhaul of the U.S. tax code in decades. TCJA has now significantly eliminated, or reduced, the ability for employers to deduct aircraft costs attributable to flights for business entertainment and certain personal non-entertainment employee flights.

 What has changed and what remains the same?

Imputed income for personal flights

The amount computed and includable in an employee’s income for personal use of an employer-provided aircraft has not changed. The amount includable in an employee’s income for personal flights will be based on either the fair market value (FMV) of the transportation provided (using FMV of a similar charter rate) or the Standard Industry Fare Level (SIFL rate). No change has been made to the reduction of the amount imputed for reimbursements received for the flight under either of these methods.

An amount of inclusion in the employee’s income may not be ignored under the premise that the employer is willing to forego the deduction, if applicable. The IRS may impute a much higher charter rate inclusion if the employer fails to appropriately impute the inclusion amount to the employee. The rules have also not changed with regards to the income inclusion amount in the circumstance where the employer provides an aircraft without a pilot.

The imputed income rules apply to all flights provided in connection with the performance of services. The rules use the term ‘employee’ to include such service providers, but the term includes partners, directors and independent contractors. These rules also apply to former employees, partners, directors and independent contractors. There has also been no change to the rules attributable to income inclusion for guests of employees.

The imputed income rules have not changed with regards to sole proprietors as sole proprietors are not considered employees.

Employer deductions for business, entertainment or personal travel

Under prior law, travel to a location (vacation or non-vacation) could be treated as a business flight even if the travel involved entertainment so long as the travel met either the ‘directly related’ or ‘associated with’ test under section 274. Under the TCJA, though, expenses attributable to entertainment activities will now be 100 percent non-deductible, whereas in the past they were 50 percent deductible as explained in our previous article.

Deductions attributable to travel for a spouse, family members or guests of the employee did not change and the costs attributable to those passengers was previously limited, unless meeting the business expense standards.

Previously, costs attributable to all personal non-entertainment flights were deductible to the employer. However, under the new law, expenses attributable to commuting between the employee’s residence and place of employment are now disallowed, except as necessary for ensuring the safety of the employee.

With respect to flights prior to TCJA, costs associated with commuting between the employee’s residence and place of employment were considered personal non-entertainment flights for which the employee was imputed income, but the employer was able to deduct all of the costs associated with the commuting flight.

To summarize the change in employer deduction treatment:

Flight Classification

Prior Law

New Law

 

100% allowed

0% allowed

100% allowed

0% allowed

Business Flight

         X

 

          X

 

Business Entertainment

         X

 

 

         X

Personal – Non-entertainment (Commuting)

         X

 

 

         X

Personal – Non-entertainment (other)

         X

 

         X

 

Personal – Entertainment

 

       X

 

         X

 

Determining which category a specific flight falls into may require a facts and circumstances analysis until additional guidance is released. Particular attention should be made to mixed use flight and/or multi-leg flights.

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