Don’t count on flying under the radar

On Feb. 21, 2024, the IRS announced a campaign to investigate the use of corporate jets by large businesses and wealthy individuals. This initiative is part of a larger IRS campaign to close the tax gap by increasing scrutiny of high-income taxpayers and large businesses. The IRS has already collected $482 million after completing audits of 1,600 millionaires. Their continued efforts aim to ensure that “high-income groups aren’t flying under the radar with their tax responsibilities.”

The IRS intends to focus on the classification of business and personal use of corporate aircraft in the new campaign, noting a business deduction for expenses related to the use of an airplane is only allowed for business purposes that can be substantiated. The IRS also acknowledges that this is a complex area of tax law, where determining the appropriate treatment and recordkeeping can be challenging.

The IRS’ examinations of corporate aircrafts typically surround three issues:

1. Whether the taxpayer qualified for bonus depreciation;
2. Whether the taxpayer has substantiated the business deduction; and
3. Whether the taxpayer has properly imputed income and/or properly calculated the depreciation disallowance for personal use.

A question on bonus depreciation is typically a legal issue relating to the interpretation of section 280F and the classification of each flight needed to meet the 50.1% qualified business use threshold required to claim accelerated depreciation. The second and third areas are typically facts-and-circumstances driven, focusing on the taxpayer’s flight log, supporting documentation and classification of flights. Any travel away from home on a business aircraft requires the taxpayer to substantiate the costs, as well as the time, place and business purpose of the travel. These factors are often logged in the taxpayer’s flight log. However, exam experience has repeatedly shown us that even a complete flight log is not considered to be appropriate substantiation. Supporting documentation, such as calendars, emails and itineraries, are often needed to- support the flight log.

Finally, classification of flights should fall into one of four categories:

1. Business;
2. Business entertainment;
3. Personal non-entertainment; or
4. Personal entertainment.

There are complex rules that govern the classification of these flights, and some classifications can be subjective. Businesses who own or lease an aircraft should work with a knowledgeable tax advisor each year.

Questions? For additional reading on corporate aircraft considerations, please visit Planning for aircraft investment. If you have any questions or concerns, reach out to your Baker Tilly tax advisor.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly US, LLP does not practice law, nor does it give legal advice, and makes no representations regarding questions of legal interpretation.