A primary Federal tax-related question business aircraft owners ask is whether and how they can deduct aircraft expenses from their taxes. Expenses include but are not limited to basic costs associated with aircraft operations, fuel, maintenance, insurance, and landing fees. Internal Revenue Code (IRC) Section 162 has specified that a deduction is allowed for expenses incurred in the operation of an aircraft so long as they are: (1) “ordinary and necessary,” (2) for the purpose of a “trade or business,” and (3) reasonable. Laid out below is a simplified explanation of each requirement.
The Aircraft Expense Must Be “Ordinary and Necessary”
“Ordinary” expenses are common and accepted business practices. For example, using a private plane for an executive is considered standard practice and thus is determined to be an ordinary expense. While this hurdle may not seem that difficult to overcome, proving that the expense was “necessary” is a more complex challenge. For an expense to classify as “necessary,” the expense must be appropriate and helpful for your business. Appropriate and helpful requires a showing that the expense provided the company with a benefit such as but not limited to direct access to your destination, fewer overnight stays, or flexible scheduling.
The Aircraft Must Be Used to “Carry on a Trade or Business”
You are required to prove that the aircraft was used for “carrying on” a “trade or business” to get the deduction of using the private aircraft. A “trade or business” is an activity you participate in for a livelihood or for profit. It requires a profit motive and for the practice to be a form of economic activity.
The Aircraft Must Be Flown for a Reasonable Business Purpose
In a 1999 NBAA survey, corporate executives gave these reasons for using business aircraft, each of which are example of and would support a reasonable business purpose:
- Employee safety and business security
- Getting critical employees to a particular place at a specific time
- Getting employees to customers’ location
- Bringing management teams to organization sites
Practical Tips
-
- Document, document, document! Contemporaneous time reports and logs are the best evidence to support deductions.
- The flight logs should differentiate and log the percentage of business vs. personal use. Include the number of trips flown, the number of people on board, the passenger’s position in the company, and the locations visited.
- If a business aircraft is flown for personal use, care should be taken to determine whether the value of the flight should be includible in the employee’s income as a taxable fringe benefit. These rules are complex so companies should retain aviation tax counsel for assistance.
Bizjet Law often provides its clients with Corporate Aircraft Use and Usage Reimbursement policies advising companies which expenses can be taken and how to document and log flights to that will support tax deductions.
If you have any questions about possible deductions for an aircraft or would like an easy-to-follow Corporate Aircraft Use and Usage Reimbursement Policy for your company, please call us at the number below or email us at Counsel@BizjetLaw.com.