Are Corporations Once Again Allowed to Deduct the Cost of a Jet?
| EXECUTIVE SUMMARY | |
 SINCE SEPTEMBER 11, BUSINESSES HAVE INCREASED their utilize of visitor-endemic shipping for employee travel. To successfully defend the cost of this travel as a concern expense, it must exist ordinary, necessary, reasonable and not lavish. | |
| KAREN C. MILLER, CPA, is a sole practitioner in Lexington, Tennessee. She also is an accounting teacher at Union University in Jackson, Tennessee, and a PhD candidate at the University of Mississippi. Her east-mail address is KcmillerCPA@aol.com . TONYA K. FLESHER, CPA, PhD, is professor of bookkeeping at the Academy of Mississippi at Academy. She is manager of the school's Tax History Research Eye and a member of the AICPA minority initiatives commission. Her e-postal service address is actonya@olemiss.edu . |
he concept of business organisation travel changed forever on September eleven, 2001. The inconveniences and risks businesspeople now experience with commercial air travel have resulted in the increasing popularity of company-owned shipping. With this shift CPAs must be prepared to justify expenses for the apply of such shipping equally a business deduction for their employers or clients. A successful defense of this travel deduction requires evidence the expense is ordinary, necessary, reasonable and non lavish. Adequate planning and appropriate documentation tin can assist companies maximize their use of corporate aircraft and support taxation deductions.
ORDINARY EXPENSES
What makes a business concern expenditure ordinary? Fifty-fifty before September 11 the utilize of visitor-owned aircraft for employee travel had become mutual equally businesses needed to be mobile to be successful. The need for mobility, along with higher prices for commercial air travel, created a climate where owning and operating an shipping no longer was considered lavish. In a survey by the National Business Aviation Association (NBAA) of companies that apply turbine-powered shipping for business concern travel, passengers reported taking an average of 21 trips past air in a six-month menstruation, using company planes for 60% of them.
| In the NBAA's 1999 utilization strategies survey, 45% of organizations reported they had increased their use of company aircraft in the past 12 months. Approximately 1-tertiary expected access to business aircraft to increment over the next three years. The NBAA also reported a surge in shared buying of planes amongst smaller companies that wanted the convenience of private jet travel. | Concern on the Move Executives take been using visitor aircraft twice as often since September eleven, 2001. Source: International Business Aviation Council (IBAC), world wide web.ibac.org . |
Companies can deduct travel expenses while employees are working away from home in the pursuit of a trade or business organization as ordinary and necessary expenses under IRC section 162(a). Treasury regulations department 1.162-two explicitly includes "travel fares" that are reasonable, necessary and directly attributable to business organization every bit valid trade or business concern expenses. The constabulary considers an expense ordinary if it is "mutual and accepted," comparing the taxpayer with "the group, the community, of which he is a part" ( Welch five. Helvering , 290 U.s. 111, 114, 54 Sup. Ct. 8, 78, 1933). In Noyce five. Commissioner (97 TC no. 46, 97 TC 670 (1991)), the court said the taxpayer incurred ordinary expenses when there was a clear business concern advantage and when the cost of replicating the travel schedule and the time savings via commercial charter would take exceeded the costs of operating a visitor shipping.
NECESSARY EXPENSES
Because personal aircraft had for so long been viewed as a lavish business perk, the courts require taxpayers to prove that aircraft they claim as business deductions are really necessary for their business organization and not just for the owner's benefit. To ensure full deductibility, CPAs need to aid taxpayers document the business utilise of their airplanes. In Richardson 5. Commissioner (72 TC Memo, 348 (1996)), the taxpayer maintained logs to prove he used his plane personally for only 3% and 9% of the time for the two years in question. He reimbursed the company for whatever personal apply. With no current limits on business shipping expenses as a luxury detail or limited-use asset, the law allows a full deduction for expenses the taxpayer tin support by providing proof of the business organization necessity to obtain a full deduction.
Some taxpayers take used the notion of urgency to support the necessity of business aircraft. The Tax Courtroom in Richardson addressed the use of the plane for quick responses to emergency situations. Acquirement ruling 70-558 allowed a deduction for the business use of aircraft when the employer did not require the use but permitted employees to travel past the company plane in urgent situations. The IRS allowed the deduction to the extent the amount exceeded the standard travel reimbursement rates for government officials.
Business aircraft allow employees to travel when they can't get commercial flights. This travel efficiency allows more time for meetings and fewer delays. In Noyce , the Tax Court held that a corporate official used the concern aircraft in the necessary execution of his duties for travel non regularly or easily scheduled. In Richardson , the taxpayer argued he used the aeroplane to enable him to travel to more than than ane location in a single day and to avoid room-and-board costs, something he couldn't accomplish with commercial travel. The Revenue enhancement Courtroom agreed and institute the expenses to be necessary. Heineman v. Commissioner (82 TC 538 (1984)) said an expense is necessary if it helps a company carry on its trade or business. In both Noyce and Richardson the Tax Court upheld the character of necessity Heineman established. "Necessity" requires an expense to be both helpful and appropriate to the business organization.
REASONABLE EXPENSES
Regulations section 1.162-2 adds a reasonableness criterion to the ordinary and necessary business expense: An expense should be reasonable in amount in relation to its purpose. CPAs may detect the reasonableness examination to be the nigh subjective ane taxpayers will have to defend when using business aircraft. However, judicial decisions for reasonableness have non been as consistent as those for ordinary and necessary.
Richardson may have established a revenue-generator examination of reasonableness. Richardson used his business aircraft for management services and had related expenses that were 26% and 17%, respectively, of the management services revenue for the two years in question. The taxpayer had also billed some of his clients for the business aircraft travel as part of his management fees. The Tax Court found these expenses to be reasonable because they generated substantial income during the years at issue.
| On the other hand, Noyce may have established an expense test for reasonableness. In that case the Tax Court replicated the taxpayer'southward travel schedule and time savings via a commercial charter carrier and determined it would take exceeded the cost of operating the private aeroplane. The court allowed Noyce all out-of-pocket expenses of operating his airplane with respect to business organization-related flights to the extent they exceeded reimbursable expenses including the business percentage of depreciation. One of the most recent and controversial cases on the reasonableness of business aircraft deductions CPAs should be aware of is Kurzet 5. Commissioner (222 F3d 830, tenth Circuit (2000)). The Revenue enhancement Court denied all of the Kurzet's expenses for Lear jet travel, claiming they were extraordinary and extravagant to avert a slight inconvenience and allowed the taxpayer to deduct only the cost of start-class travel on a commercial carrier for trips to a timber subcontract in Oregon. | Concern Aircraft Resource National Business organization Aviation Association Inc. (NBAA) |
The 10th Circuit Court of Appeals disagreed with the method the Tax Courtroom had used to calculate reasonableness proverb the lower court used drastically overinflated numbers. The Tax Court underestimated the number of business trips taken, did not give sufficient weight to time savings and should not have used depreciation to consider reasonableness. The upshot was information technology based its assessment on inflated figures. The 10th Circuit recalculated reasonableness using the number of trips flown times 12 hours saved each trip times Kurzet's time at $200 an hour and added this to the Tax Courtroom's finding that splendid round-trip airfare was $one,600. When it compared these expenses with the cost of operating the Lear jet, the tenth Circuit found the expenses to be reasonable.
Field service proclamation (FSA) 200137002 cites both Noyce and Kurzet for the deduction of reasonable expenses. The ruling cites Noyce for the total deductibility of Lear jet expenses if they are ordinary, necessary and reasonable. Nevertheless, the ruling cites Kurzet for expenses that are ordinary and necessary merely non reasonable. If an otherwise ordinary and necessary expense is unreasonable, the ruling suggests a deduction limited to the price of starting time-course airfare.
REASONABLE Concern PURPOSES
A company's first footstep in successfully defending a business organisation aircraft deduction is to apply the airplane in an enterprise that operates at a profit. CPAs volition find that businesses the taxpayer does not engage in for profit won't exist allowed whatever business deduction. The IRS will scrutinize big business aircraft deductions from entities that generate piddling or no profit. Personal airplane expenses disguised as trade or business expenses aren't justifiable deductions. Ordinary expenses should be common and accustomed, with a business organization advantage.
In the 1999 NBAA survey, corporate executives gave these reasons for using business shipping:
Employee safety and industrial security.
Getting their cardinal employees to the right place at the correct time.
Getting employees onto the customer's turf.
Transporting direction teams to arrangement sites.
| The IRS provides no specific guidelines on reasonableness, making the examination very subjective. As a result CPAs should advise companies using business aircraft to be prepared to certificate reasons such as those listed above—and whatever other business purposes—to help defend shipping employ as an ordinary expense. Necessary expenses should produce time and toll savings relevant to the business concern. According to main pilots in an earlier 1997 NBAA survey, company shipping mainly were needed considering employees could not see business schedules efficiently using commercial airlines. The second major reason was to achieve locations commercial airlines did not serve. CPAs can apply these examples to document the time and costs savings business aircraft generate. If the taxpayer cannot back up reasonableness, the IRS and the courts will limit the deduction for aircraft use. Richardson and Kurzet give 2 examples for the reasonableness test. As in Richardson , CPAs should consider using a revenue-generator test. Compare business organization aircraft deductions with the revenue generated in the divisions or areas of the concern using the equipment for reasonableness. Post-obit Kurzet , consider using an expense test. Accountants can compare the cost and time savings of the concern aircraft with the expenses the taxpayer would incur for lease or commencement-class commercial flights. | Practical TIPS TO REMEMBER When advising companies seeking to deduct the expenses of company-owned shipping, CPAs should go on this advice in mind. |
Brand sure the company can document the expenses as ordinary and necessary nether IRC section 162(a). MAINTAINING APPROPRIATE DOCUMENTATION
A successful defense force will require the company to have adequate documentation. CPAs should advise companies to maintain a log of business aircraft use proving the pct of business vs. personal use. An efficient log should include the number of trips flown, the purpose of the trip, the number of people on board and the locations visited. CPAs tin can utilise a cost-benefit analysis to certificate the position held and the hourly cost and value of the passengers.
Co-ordinate to the 1997 study, 28% of the passengers on business aircraft were top management and 49% were center management. Companies estimated the cost and the related value of each of these passengers to their employers at $259 and $551 per 60 minutes, respectively. CPAs tin use surveys such as this i to document what is ordinary. Companies also should provide evidence of partial billing of business aircraft expenses for personal utilize. Reimbursement statements tin can also benefit employees paying for nonreimbursed travel expenses out of pocket. Finally, the company should certificate all of the operating expenses of the concern aircraft including fuel, maintenance, hangar costs, staff, training and licenses. Documentation is cardinal to ensuring a taxation advantage for using corporate aircraft as a merchandise or business expense.
Revenue enhancement VS. Concern Do good
Companies should make the decision to use business organization aircraft based on the efficiency and value to the enterprise. The growing demand for mobility and the rising cost of commercial airfares accept made using business aircraft a smart motility for many companies—non merely a taxation deduction. Business travelers scheduling commercial travel unexpectedly may pay anywhere from four to eight times more per ticket than leisure travelers, who can tolerate delays. The savings to a company from using business organisation aircraft for frequent and unanticipated travel by ane or more valuable middle to top-level management personnel can ofttimes exceed the commercial airfare. The savings a visitor tin can realize by avoiding overnight lodging and meals are considerable too. Using business aircraft also means employees tin spend more than time at home, which is a large quality-of-life advantage in retaining middle and upper management. If used efficiently, business aircraft can be a big nugget to profitable businesses.
THE Evolution OF BUSINESS TRAVEL
Business growth and mobility play a significant part in the increasing employ of corporate aircraft. What were once lavish perks have get ordinary, necessary and reasonable expenses when used for business concern purposes. Business travel has evolved fifty-fifty further since September eleven as workers seek to avoid the long lines and security checks of commercial air travel. When the IRS scrutinizes company aircraft use, subsequent judicial decisions will be based on a taxpayer's ability to provide supporting documentation of the reasonable business expense vs. owner benefit. Therefore, CPAs should encourage employers and clients to plan fairly and to maintain the appropriate documentation to support their aircraft expense as ordinary, necessary and reasonable.
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Source: https://www.journalofaccountancy.com/issues/2003/jul/deductibilityofbusinessaircraft.html
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