Corporate Jet Tax Breaks at Risk in IRS Probes of Personal Use

IRS agents are cracking down on personal use of corporate jets, in part because abusive deductions can signal that companies are taking much larger writeoffs upfront than they’re entitled to.

The agency in February announced a campaign of auditing corporate jet use as part of its broader initiative to get the taxes owed by wealthy individuals and complex partnerships. Democrats have also called for tighter restrictions on how corporate jet owners can deduct certain travel costs.

IRS training materials obtained by Bloomberg Tax suggest the audits are focused on whether the plane has enough business use to qualify for bonus depreciation, a tax incentive that allows businesses to deduct a larger percentage of the asset’s cost up front. IRS’s focus on bonus depreciation could produce more tax revenue from the audits because it often results in large tax losses for companies, tax professionals said.

“In a way, that’s what triggers the audit,” said Daniel Cheung, principal and co-founder of Aviation Tax Consultants LLC, said.

Training Auditors

The training materials, obtained through a Freedom of Information Act request, include multiple examples of how auditors should calculate whether the plane has a qualified business use, which is required to qualify for bonus depreciation. The agency fully redacted about 80 percent of the records sought, saying FOIA allows agencies to exempt agency memos that “wouldn’t be available by law to parties other than those in litigation with the agency.”

The materials provided repeatedly use an example of seven people who appear to be a family using a corporate aircraft for combinations of vacations, business and other trips. They then provides sample calculations of two tests that a plane must meet to qualify for bonus depreciation: 25% business use by employees other than the company’s 5% owners, and 50% business use overall.

The materials instruct agents to ask for flight logs, to determine that personal flights weren’t deducted as business expenses and to ensure a certain number of the plane’s flights were for a business purpose. Personal flights are considered income for the executive that takes the flight, so flight logs will also show whether that income was applied. There’s a specific calculation companies must follow to convert the flight to income.

The sample calculations in the training documents appear focused on planes owned by larger companies, said Zafar Asghar, an attorney who owns a private aviation transaction consultancy. He said they’re mostly straight-forward calculations common among the industry.

“Corporations have whole departments focused on this,” Asghar said. “No one is taking advantage of the rules blatantly. If they are, they will get caught.”

Lee Meyercord, a tax controversy partner at Holland & Knight, said many of the audits she’s seen are related to either bonus depreciation or hobby loss rules, which prohibit taking losses for activities not related to pursuing a profit. Meyercord mostly deals with audits centered around high-net-worth individuals and partnerships.

The IRS tends to audit the earliest possible year it can, said John Hoover, a partner at Holland & Knight who specializes in business aviation. That means audits starting now will typically focus on 2021 and 2022 tax returns, for which bonus depreciation was at 100%. Bonus depreciation jumped to 100% after the Republican 2017 tax overhaul and started phasing out, 20% at a time, in 2023.

Finding Business Use

The training materials include the information agents should request from taxpayers with business aircraft.

The initial requests include a detailed flight log, maintenance log, passenger manifest, aircraft purchase documents, lease or operating agreements, management contracts, documents indicating the aircraft’s business purpose, and calculations for any expense limitations or disallowances.

There’s also a list of questions specific for chartering, including whether the charter company is related to the taxpayer, the charter agreement, and if the taxpayer paid the fair charter value, among other questions.

Angel Houck, co-founder of Houck & Christensen CPAs LLC, said during an October National Business Aviation Association panel that it appears that agents have gotten more sophisticated than they were five or 10 years ago. She said she would see audits where agents didn’t ask about related-party leasing or depreciation limitations, but that’s not the case anymore.

“The requests are very, very detailed,” Houck said. “They want hotel receipts, car receipts from every single trip.”

Michael Kosnitzky, co-leader of Pillsbury Winthrop Shaw Pittman LLP’s private client and family office practice, said IRS agents have been “more aggressive” than in the past.

“They’ve been very unforgiving in terms of documentation,” Kosnitzky said.