Corporate Jet Use Crackdown Is a Poor Way to Boost Tax Revenue

The US government has made clear it intends to focus on taxing business aircraft. But it’s inappropriate to characterize large corporations and high-net-worth individuals who use business aircraft as “flying under the radar with their tax responsibilities,” as IRS Commissioner Danny Werfel said.

It is also bad policy to single out business aviation for enhanced tax enforcement and increased taxes, given the positive contributions of business aviation to the US economy, and the complexity of relevant tax laws.

Increasing Aircraft Audits

The IRS stated its intent to increase audits of business aircraft usage in February. This policy would be expensive and disruptive for affected companies.

Business aircraft that operate for US taxpayer customers typically fly within the US, producing jobs and business activity for US companies that use the aircraft, and also for those that support and maintain the aircraft. An unnecessarily heavy compliance burden on such companies is poor policy.

The IRS indicates its audit focus will be on large corporations and high-net-worth individuals who might improperly classify personal flights as business flights. However, such corporations and individuals typically hire experienced tax staff and outside tax advisers who avoid such practices.

Current tax audits of aircraft are open to interpretation. Some areas of the law that may be at issue include the extent of documentation needed to support tax classification of flights, proper classification of flights under entertainment disallowance regulations, the predominant business use test (which can result in ineligibility for bonus or accelerated depreciation), passive loss disallowance, and hobby loss disallowance, to name a few.

To prepare for tax audits, companies that use business aircraft should consider reviewing the sufficiency of their records documenting the business purposes of flights. They also should consider consulting tax advisers who specialize in business aircraft tax matters to review the structure of their aircraft ownership and operations to identify any other tax concerns.

Letter From Senators

Another concern is a letter from six senators to the IRS and Treasury in March, supporting the IRS audit initiative and requesting Treasury increase the rate at which income is imputed to executives for their personal flights on company aircraft.

The letter correctly stated that the standard industry fare level rate is low. SIFL rates determine how much a company must impute to an employee for personal travel on an employer-provided aircraft.

The Senate Finance Committee directed Treasury to adopt the SIFL rate in 1985, because valuing flights based on comparable charter rates was too complex; requiring the charter rate method could have a negative impact on aircraft companies; and setting the SIFL rate low motivates companies to actually use the SIFL rates, reducing the administrative burden. That directive also described the SIFL rate calculations in detail.

The reasons for the SIFL rate are as valid today as when the Senate Finance Committee directed Treasury to adopt it. The senators’ letter doesn’t constitute an expression of the will of the Senate as a whole or of the Senate Finance Committee. Treasury shouldn’t deviate from the 1985 directive based on this letter from six senators.

The senators’ letter asserts that, by undervaluing personal flights provided to executives, the SIFL rate minimizes taxes paid. However, in the case of an ordinary personal vacation flight, the company providing the flight can only deduct the cost of the flight to the extent of the amount reported as imputed income.

An increase in the SIFL rate as suggested in the letter would merely shift taxable income from the company to the executive, but it wouldn’t increase the total amount of taxable income.

Presidential Proposals

Among the many proposals in President Joe Biden’s budget released after his State of the Union address in March are lengthening the depreciation life of business aircraft from five years to seven years, and dramatically increasing the fuel tax rate on jet fuel used by business aircraft.

Both proposals generally would take effect in 2025 and would increase taxes with respect to business aircraft.

The budget proposals’ attempt to impose more tax on business aviation is poor policy considering the industry’s contributions to the US economy and the complexity of relevant tax laws.

Rather than increase enforcement, it would be more constructive for the IRS and Treasury to provide clearer guidance, such as with respect to the definition of “entertainment.”

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

John B. Hoover is partner at Holland & Knight, focusing on federal and state tax planning, compliance, and controversy matters involving business aircraft and tax-exempt organizations.

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