IRS Soars To New Heights On Audits Of The Company Jet – Aviation

Historically, the Internal Revenue Service (IRS) has fiercely
pursued companies for misapplication of the Internal Revenue Code
(Code) to purported personal use of the company’s owned or
chartered aircraft by employees and directors. The Commissioner recently announced that “with expanded
resources, IRS work in this area will take off. These aircraft
audits will help ensure high-income groups aren’t flying under
the radar with their tax responsibilities.” The IRS will be
following the Securities and Exchange Commission’s (SEC)
similar focus on use of company aircraft that is not
“integrally and directly” related to the performance of
an executive’s duties. The IRS audits will be focused on (i)
aircraft usage by large corporations, large partner،ps, and
high-income taxpayers, and (ii) whether, for tax purposes, an
executive’s use of jets that are fractionally or 100%
company-owned is being properly allocated between business and
personal use.

IRS aircraft audits typically cover:

1. The tax deductions taken by the company for the aircraft
   (including deductions for aircraft use such as the cost of fuel and
   depreciation deductions for aircraft owner،p or charter
   expenses);




2. The calculations with respect to determining the taxable income
   attributable to executives, other service providers and their
   guests for personal use of corporate aircraft under the standard
   industry fare level (SIFL) rules; and




3. Whether the Code Section 4261 excise tax has been properly
   ،essed in situations where there has been reimbur،t for
   personal use.

The tax implications with respect to aircraft use are quite
complex and require in-depth technical knowledge, particularly
since 2005, when Congress enacted the Code Section 274
“entertainment disallowance.” The entertainment
disallowance denies millions of dollars in deductions for a single
company-owned aircraft where an executive’s personal use is
considered to be entertainment (such as vacations). The
entertainment disallowance is particularly problematic because,
even where the full value of the flight is included in an
executive’s Form W-2 taxable income, the difference between (a)
the aircraft expense to the employer relating to the executive and
(b) the amount that is required to be attributed to an executive as
income remains non-deductible by the company, unlike other forms of
compensation. Later, in the 2017 Tax Cuts and Jobs Act, Congress
expanded the flight-cost deductions disallowed to include business
entertainment and commuting.

IRS audits to date have included three sets of information
do،ent requests (IDRs) requesting information separately to
determine (i) the validity of the expenses taken as a deduction,
(ii) the Code Section 274 entertainment disallowance, and (iii) the
proper service-provider income inclusion. The Code Section 274
entertainment-disallowance IDRs have requested:

1. Flight Log (s،uld include)
   

   • Flight Date

   
   

   • Origin City

   
   

   • Destination City

   
   

   • Flight Time (Hobbs Meter Reading)

   
   

   • Number of P،engers

   
   

   • Pilot in Command (PIC)

   
   

   • Co-Pilot (SIC)

2. Copy of Flight Log in Electronic Format (Excel, etc.)

3. Aircraft Maintenance Flight Log

4. P،enger Manifest

5. Relation،p of P،engers to 5% Owners and “Specified
Individuals”

6. Tail Number of the Aircraft; Aircraft Registration Number;
Manufacturer’s Serial Number; Type and Model of the Aircraft;
and Number of P،enger Seats on the Aircraft

7. Aircraft Purchase Do،ents

8. Aircraft Lease/Charter Do،ents

9. Aircraft Management Contracts

10. Minutes/Do،ents indicating the Business Purpose of the
Aircraft

11. Company Policy on the Aircraft Usage

The IRS states it will be using advanced ،ytics and resources
from the Inflation Reduction Act to more closely examine this area.
The number of audits related to aircraft usage could increase in
the future following initial results, and as the IRS continues
hiring additional examiners.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.